AL MUFEEDTRANSACTIONS OF ISLAMIC BANKS

Written By

Hamad Farooq Al ShaikhChecking and Introduction by

Dr. Abdul Latif Al MahmoodShaikh Nizam Yacooby

Message by Shaikh Dr. Abdul Latif Al Mahmood

Praise be to Almighty Allah, the Lord of the Worlds, and peace and blessings be upon the Messenger of Allah, the sincere and honest, and upon his scion, companions and wives, and upon all those who follow his guidance to the Day of Judgement.

Brother Hamad has made commendable efforts in writing the book “Al Mufeed- Transactions of Islamic Banks.” After I felt his keenness to explain the subjects contained in the book in a simple and easy way to the unsophisticated reader to benefit practitioners working in Islamic banks and those dealing with them, and after I saw the great attention he paid to the issue of verifying Shari’a rules contained in it, I undertook to check it very carefully and thoroughly in order to help him realize his objectives and goals.

With the grace of Almighty Allah, Shaikh Hamad compiled transactions carried out by Islamic banks and illustrated them from all aspects and explained the rules governing them. He also cited many modern and contemporary financial transactions, by quoting resolutions issued by Islamic Fiqh academies and the opinions of Shari’a Supervisory Boards (SSB’s), particularly the fatwas issued by BiSB’s SSB since the Bank’s inception until the present time (1979-2010).

Finally, I pray to Almighty Allah to bless us with the benefits of the work of this author, and guide his steps to what pleases Him, and to reward plentifully those who have contributed to its publication.

May Allah’s prayers be upon our Messenger, Mohammed, and upon his scion and companions. Amen.

Monday, 25th Shawwal 1431 HejraCorresponding to 4th October 2010

Dr. Abdul Latif Mahmood Al MahmoodChairman of the Shari’a Supervisory Committee

Bahrain Islamic Bank (BiSB)

Message by Shaikh Nizam Yacooby

Praise be to Almighty Allah, and peace and blessings upon the Messenger of Allah, and upon his scion, companions and followers, Amen.

I have checked the Guide entitled “Al Mufeed-Transactions of Islamic Banks,” written by brother Shaikh Hamad Farooq Al Shaikh, and found it to be useful in its field, new in its presentation and innovative in its illustrations, photographs and tables.

I pray to Almighty Allah to benefit its author, reader and publisher, and to weigh it in his scale on the Day of Judgement. An old adage says, “perhaps a good illustration is better than one thousand words.”

Allah is the purveyor of success, and he is our Guide to the right path.

May Allah’s blessings be upon our Messenger, Mohammed, and upon his scion and companions. Amen.

Monday, 25th Dhu Al Qi’dah 1431HCorresponding to 2 November 2010

The servant of knowledge in BahrainNizam Mohammed Saleh Yacooby

Member of the Shari’a Supervisory Committee

Bahrain Islamic Bank (BiSB)

Praise be to Almighty Allah, who says, “But Allah has permitted trade and forbidden usury,” and made it one of the major sins and infectious plagues. Peace and blessings be upon our Messenger, Mohammed, the chosen Messenger of Allah, and upon his scion and companions, who are blessed with grace and elevated positions, and upon his followers and their followers to the Day of Judgement, except those who refuse, Amen.At the beginning of my professional career with Islamic banks, I wanted to read a brief and yet comprehensive book about the Fiqh of Islamic financial transactions in the form of Islamic financial institutions’ transactions that would benefit me in my discipline as a beginner in order to understand this discipline in a compressive and brief way. After searching extensively in Arabic and Islamic libraries and bookshops and after sifting through electronic resources, I did not find any book that would satisfy my thirst for knowledge and guide me to the modern Fiqh of Islamic financial transactions. However, I found a few books dealing with the Fiqh and accounting fundamentals of Islamic transactions in a sophisticated and difficult manner, which needed a code to decipher ambiguous things in them.Imagine with me the suffering and pains which a new researcher experiences in this discipline in trying to understand the rules of banking transactions, due to the lack of simplified references in this field which are easy to read and understand by beginners. I then asked myself one question: How could we spread this discipline among the general public, or even specialists, who do not know about it or about its principles? My answer was: Is this not the right time to write, publish and translate such books, particularly when Islamic economy and Islamic financial institutions are growing at a fast rate day after day?For this purpose, I formulated an idea in my mind, and I wanted it to see the light through a practical experience by endearing to the people the Shari’a principles of transactions conducted by Islamic financial institutions in a simplified and brief way, without any unnecessary repetition in texts and without any superfluity or circumlocution. The result was this humble work, represented in the book “Al Mufeed” which is a brief but useful summary of modern banking transactions applied and executed by contem-porary Islamic banks and financial institutions. I tried as much as possible to avoid unnecessary details and controversial Fiqh disputes and differences in order to make it easy to the reader to understand the most important Fiqh rules and practical steps of such transactions.I do not claim to say that this book contains everything the reader needs in the form of Fiqh and rules governing Islamic financial transactions. However, a beginner will, with the permission of Allah, find in it something sufficient to satisfy his requirements and fulfill his hunger for knowledge.

Introduction

Perhaps what distinguishes this book, in addition to being brief and concise, is that it contains many illustrative tables compar-ing many Islamic financial products with their conventional counterparts. This will enable the reader to identify many main dif-ferences between the two systems. In addition, there are many illustrative graphs explaining the steps of banking transactions to enable the reader to understand them in a clear way. I have also quoted a number of Qur’anic verses and Hadiths of the Messenger of Allah dealing with economic principles and financial transactions. The book also contains many useful informa-tion and statistics about banks and Islamic financial institutions and the world economy. There are also many sayings and well-known testaments by specialists, economists, heads of state and writers, both Arabs and foreign, in this field. In addition, I wanted this book to be in a modern style in terms of layout, by using colours and modern divisions which stimulate the mind and help the reader overcome boredom, encourage reading and help understanding the information in a better way. This book has taken nearly ten months, covering research, compilation, design, checking and publication.On this occasion, I would like to extend my sincere thanks and appreciation to those who have supported me in writing this book, mainly the brothers from Khalil Graphics, particularly brother Mohammed Al Adl, for their efforts in designing and laying out this book. I would like also like to extend my special thanks to my dear wife who has not spared any of her time and efforts, by making a number of observations and comments and by encouraging me over the period of writing the book. She herself designed the illustrative graphs using the 3D MAX software, with the result that the book has taken this special and unique shape.I would like also to extend my deep gratitude to the two eminent Shaikhs, and the well-known scholars, His Eminence Dr. Abdul Latif Al Mahmood, Chairman of the SSB, and His Eminence Shaikh Nizam Yacooby, Member of the SSB, of Bahrain Islamic Bank, for gracefully checking this book in a through and careful way. I pray to Almighty Allah to reward them generously for their efforts.Last but not least, I would like to commend the leading Islamic bank in the Kingdom of Bahrain, headed by Mr. Mohammed Ebrahim, the Chief Executive, for encouraging and supporting me in writing this book, which we insisted that it should be made readily available to everyone free of charge, seeking a reward from Almighty Allah.In conclusion, I pray to Almighty Allah to benefit all from this book, and to make it a beacon and guide for all who are working in this field.May Allah’s peace and blessings be upon our Messenger, Mohammed, and upon his scion and companions. Amen.

Author- Hamad Farooq Al ShaikhShari’a Supervisor and Reviewer

Bahrain Islamic Bank

Table of Contents

Chapter

Chapter I 10

Chapter II 12

Chapter III 20

Chapter IV 24

Chapter V 28

Chapter VI 32

Chapter VII 36

Chapter VIII 44

Chapter IX 56

Chapter X 60

Chapter 70

Chapter XII 76

Chapter XIII 82

Chapter XIV 86

PageChapter

Principles of Islamic Economy

Sales in Islam

Differences Between Islamic Banks and Conventional Banks

Loan

Murabaha to the Purchase Orderer

Musawama

Tawarruq (Monetization)

Documentary Credit

Bills of Exchange

Ijarah with the Promise to Own and Described Ijarah (Forward Ijarah)

Diminishing Musharaka

Mudaraba

’Istisna’ and Parallel Istisa

Salam and Parallel Salam

Chapter

92Chapter XV

98Chapter XVI

102Chapter XVII

106Chapter XVIII

116Chapter XIX

120Chapter XX

122Chapter XXI

124Chapter XXII

126Chapter XXIII

130Chapter XIV

134Chapter

140Chapter XXVI

144Chapter XXVII

155

PageChapter

Sukuk

Investment Funds

Securities (Stocks and Bonds)

International Commodity Sales

Commercial Papers

Trading in Currencies

Agency

Guarantee

Mortgage

Cards

Fees for Banking Services and Products

Insurance

Zakat

References

“The way to development is not restricted to the capitalist or so-cialist systems but is apparent in a third one which is the Islamic economic system. The latter will dominate the world in the future be-cause it is a global way of life that guarantees success and avoids evil.” The French economist, Jacques Austruy, in his book “Islam and Economic Development”

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Principles of Islamic Economy

Chapter I

Allah, the Almighty, says, “Those who eat riba (usury) will not stand ex-cept as stands one whom the Satan by his touch has driven to madness. That is because they say: ‘trade is like usury, but Al-lah has permitted trade and forbidden usury. Those who after receiv-ing admonition from their Lord, desist, shall be par-doned for the past their case is for Allah to judge-but those who repeat the offence are companions of the fire: they will abide therein for ever” (Surat Al Baqarah-verse 275).

First: DefinitionIslamic economics is a set of economic principles and fundamentals which govern the economic ac-tivity of the Islamic State in accordance with the texts of the holy Qur’an and the Messenger of Allah’s Sunna, which can be applied to suit the circumstances of time and place. Islamic economics deals with the society’s economic problems from an Islamic perspective of life.

Second: Creed of Islamic Economics The creed of Islamic economics is based on two principles:1. Money is that of Allah, and we are vicegerents in using it: In this way, we are responsible for

this money in earning and spending it, towards Allah, Subhana Watala, in the Hereafter and towards people in this life. Therefore, we should not earn it by disobeying Allah or spend it by committing unlawful acts, nor by causing harm to people.

2. The role of cash: Money is a tool to measure the value and a method of trade exchanges, and not one of the commodities. So, it may not be sold, purchased or leasedin it self.

Third: Features of Islamic Economics1. It is a divine in nature and source: Islamic economics is an independent one, based on divine

inspiration, and not a set of patched ideas, Eastern and Western, or human ideas.2. Easy and removal of difficulty, exorbitance or unnecessary restrictions: Islamic eco-

nomics depends on the Fiqh rule which states that “the essence in transactions is that they are law-ful,” and it is based on the Shari’a rule that Shari’a is based on facilitation and removal of burden. It prohibits only for the sake of obviating harm and damage. Everything that is not prohibited in a certain text is allowed and lawful. Allah, the Almighty, says, “Allah does not wish to place you in a difficulty.” (Surat Al Ma’idah - Verse 5). The Messenger of Allah, peace be upon him, says, “Halal (lawful) is what Allah has made lawful in his Book, and Haram (unlawful) is what he has made unlawful in his Book, and what he has been silent on is that which he has forgiven.” Narrated by Al Turmuthi.

3. Participation in risks: This constitutes the basis and pillar of Islamic economics, which singles it out among other economic systems. Participation in profit and loss is the rule governing the distribu-tion of wealth between the capital and labour, and it is the basis that ensures justice and fairness in

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The Messenger of Allah, peace be upon Him, says, “Avoid the seven great destructive sins.” The companions enquired, “O Allah’s Apostle! What are they?” “He said, “To join others in worship along with Allah, to practice sor-cery, to kill the life which Allah has forbidden except for a just cause, (accord-ing to Islamic law), to eat up Riba (usury), to eat up an orphan’s wealth, to give back to the enemy and flee from the battlefield at the time of fighting, and to accuse of adultery chaste women who never even think of anything touch-ing chastity and are good believers,”(Narrated by Al Bukhari).

distribution according to the rule “Al Ghurm Bi-al-ghunm” (entitlement to a return is related to the liability of risk).

4. Circulating money and not hoarding it: This is ensured through Zakat and encourag-ing spending. Shari’a obligates the wealthy to pay Zakat on their money to the poor and the needy, and it has promised those who spend with a generous reward, in order to encour-age them to spend, instead of hoarding money. Spending stimulates the economy and fuels growth and production and this ensures justice and fairness in distribution and elimination of poverty.

5. Encouraging growth and production: The Messenger of Allah, peace be upon Him, encourages the cultivation of uncultivated land. He says, “He who cultivates an uncultivated land it belongs to him,” (Narrated by Al Turmuthi). The Holy Qur’an also encourages us to cultivate land. Allah, the Almighty, says, “It is He who has produced you from the earth and settled you therein,” (Surat Hud- Verse 61).

6. Respect for private property and balancing it with public property: The Islamic economic system protects private property. Individuals have the right to own land, properties and different means of production, of whatever kind and size, provided that such possession and ownership should not lead to inflicting damage to the interest of the general public, and that there should be no monopoly of commodities needed by the public. In this way, the Is-lamic economic system differs from, and opposes, the Socialist System which considers that everything is owned by the public as a property held in common. Vital utilities, which are important for the life of people, also remain the property of the State or under its supervision and control in order to provide the basic needs of people and to serve the society’s general interest. In this way, the Islamic economic system also differs from, and opposes, the Capitalist System which allows the ownership of everything.

7. Prohibition of harm: Islam prohibits all sales which lead to harm to the individuals or to the society. For example, it prohibits riba (usury) and monopoly and prevents gharar (uncertainty) in contracts and sales. It also prohibits trading in harmful things, like wine, pork and their de-rivative products. Islam also prohibits gambling and betting. The Messenger of Allah, peace be upon Him, says, “There is no harm or reciprocating harm,” (Narrated by Ibn Majah).

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Sales in Islam

Chapter II

Allah, the Almighty, says,“An honest trader who is a man of truth will be (on the Day of Judge-ment), with the Messen-gers of Allah, truthful and martyrs.”(Narrated by Al Tirmithi)

Do you know?Mohammed Abdulla Al Arabi, Isa Abduh, Mo-hammed Baqer Al Sadr, Mohammed Najatullah Siddiqi, Mohammed Aziz, Ahmed Abdul Aziz Al Najjar, Abdul Hameed Al Ghazali and Yousuf Al Qa-radawi are the first schol-ars who proposed the idea of establishing Islamic financial institutions and who have the credit for taking the idea to fruition in the 1950s?

First: Definition of SaleSale is defined as a transfer of the title of an asset “property” or “commodity” from one person to another in consideration for a specified price.

Second: Conditions of SaleA) Conditions of the Seller and Buyer

1. Majority: A person who has not attained the age of majority may not sell or buy. However, a minor may buy small things, while his sale may not be relied upon without obtaining his parent’s consent.

2. Reason: An insane may not buy or sell. Unlike the minor who may buy small things, an insane person may not do so.

3. No distraint or interdiction: A distrained or interdicted person, due to bankruptcy or prodigality, may not buy or sell under any circumstances.

4. Consent: Sale and purchase may not be made without the consent of both parties, in accordance with what is stated in the Holy Qur’an, as follows: “O you who believe! Eat not up your property among yourselves in vanities: but let there be amongst you traffic and trade by mutual good will.” (Surat Al Nisa’- Verse 29).

B) Conditions of the CommodityThe commodity, whether a value or a counter value, should fulfill the following condi-tions:

1. It should be pure: Unclean and prohibited things, like dead meat, pork and wine, etc., may not be sold or bought.

2. It should be utilized in a Shari’a-compliant way: Insects, for example, may be sold, unless they are proved to be beneficial and useful.

3. It should be owned by the seller or that the seller is allowed to sell it: A person may not sell what he does not own, so long as he is not allowed to do so.

4. It should be deliverable: For example, what cannot be delivered may not be sold, like a car to be bought next year.

5. It should be specified and known: It is not permissible to say, “I will sell you one of my cars for so much amount,” because you have not specified which car you are going to sell.

6. The value should be ascertained: The price should be specified before the contract is con-cluded, or else it becomes void.

7. It should not be temporary: Like when the seller says to the buyer, “I hereby sell you this camel for such a price of money for one year.”

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The Messenger of Allah, peace be upon Him, says,«May Allah show mercy to a man who adopts a kind attitude when he sells, buys and demands for the payment of loans.»(Narrated by Al Bukhari).

Said“We want to make the City of London the global cen-tre for Islamic finance, in view of the work done in tax and regulatory reform to support the develop-ment of Islamic finance products.” Gordon Brown, the Chancellor of the Exchequer in 2006 and later the British Prime Min-ister.

Third: Classification of SalesA) Classification of Sales by the Type of CommodityA sale is divided into four types according to the subject of exchange:

1. Absolute Sale: It is the exchange of an asset for cash. This is the most common type of sales, and it allows people to exchange for their money any assets they need.

2. Salam Sale: It is called advance sale, whereby a debt is exchanged for an asset, or the sale of something that is deferred for something prompt.

3. Sale of Cash: It is the sale of values against each other, and it is defined as the sale of cash against cash, of the same type or otherwise, like selling gold for gold, silver for silver or one of them against the other.

4. Barter Sale: It is the exchange of an asset for another asset other than cash. For this sale to be valid, both assets they should be equal in exchange if both counter values are of the same type and amount.

B) Classification of Sale by the Method of Specification of ValueSales are classified into three types according to the method of specification of value:

1. Musawama Sale: It is the sale where the seller does not disclose his capital or profit, i.e. it is a sale without disclosing the original price.

2. Bidding Sale: It is the sale whereby the seller discloses his commodity on the market and the buyers outbid each other, and the commodity is sold to the highest bidder. Bidding sale is similar to auction sale, where the buyer offers to buy a commodity of certain specifications, and the sellers outbid each others in offering to sell their commodities for the lowest price, and the sale is awarded to whoever accepts the lowest price.

3. Amana (Trust) Sales: They are the sales in which the price is specified as the same principal amount, or more or less. They are called “trust sales” because the seller is trusted in disclosing the principal amount. These sales are of three types:• Murabaha Sale: It is selling a commodity for the original price paid by the seller, with a

certain mark up agreed upon between the seller and the buyer.• Tawliya Sale: It is the sale of the commodity for the original price paid by the seller

without increase or decrease.• Al Wadhee’a Sale: It is the sale of a commodity for the same original price paid by the

seller with a reduction (hatt) of a certain amount from the price, i.e. a certain loss.

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C) Classification of Sales by the Method of Delivering the Price

1. Sale for immediate price: In this sale, the price should be paid promptly. This sale is called cash sale of prompt cash.

2. Sale for deferred price: Price under this sale is deferred.3. Sale for deferred commodity: It is like the Salam and Istisna’ sales.4. Sale for deferred counter values: It is sale of a debt for a debt, and it is prohibited in general.

Fourth: Types of Prohibited SalesIslam does not prohibit any types of sales, except for certain reasons. They are as follows:1) When the commodity is unlawful or unclean: The general rule is that the price of every-thing prohibited by Almighty Allah is also prohibited. Examples of this are the following:

• Prohibition of the sale of al coholic Beverages.• Prohibition of the sale of pork.• Prohibition of the sale of dogs except for hunting or for protection.• Prohibition of the sale of blood.• Prohibition of the sale of idols.• Prohibition of the sale of pornography.

In this respect, Jabir, may Allah be pleased with him, said he heard the Messenger of Allah, peace be upon Him, saying: “Allah, the Almighty, prohibited the sale of wine, dead meat, pork and idols.” The Companions said, “O Messenger of Allah, the lard of the dead meat is used to dye ships, tan leather and as oil in lamps. Is it haram (unlawful)?”. He said: “May Allah fight the Jews, when He prohibited the lard of the dead meat, they processed it, sold it and ate up its price.” (Narrated by the majority of narrators).

2) When the contract leads to haram or to leaving a duty. For example:• Sale at the time of the second call for Friday prayers in order not to distract people from the

duty of prayers. Allah, the Almighty, says, “O you who believe ! When the call is proclaimed to prayer on Friday (the day of Assembly), hasten earnestly to the Remembrance of Allah, and leave off business (and traffic) (Surat Al Jumu’a - Verse: 9).

• The sale of arms and weapons at the time of sedition or civil war.• Sale of grapes for those who process it into wine, etc.

Sales in Islam

Chapter II

Do you know?Capitalism is an eco-nomic system of a socio-political theory, based on the principle of promoting individual ownership and encouraging it, with an expanded concept of lib-erty and free enterprise. The world has suffered a lot because of capital-ism, and it is still mount-ing pressure on people and societies. It has also political, social and cul-tural interference and is weighing up heavily on all people of the world.

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3) When the sale involves gharar (excessive risk taking or uncertainty), like gambling. This includes the sale of something which the seller cannot deliver, such as:

• Selling fish in the water and birds in the air.• Bai’ Al Mualamasah (touch sale): It is when the two contracting parties exchange the commodity

from outside, without inspecting or seeing it.• Bai’ Al Munabatha (discard sale): It is when you say “throw down what you have and I throw

down what I have” and the sale is concluded.• Bai’ Al Muhaqala: It is the sale of the harvest in the ears (harvested wheat).• Bai’ Habal Al Hiblah (sale of the unborn camel): It is the sale of the meat of the unborn camel for

a deferred price until the she-camel gives birth.• Bai’ Al Mukhadara: It is the sale of fruit while still green, before it becomes suitable and ripe for

harvesting. • Bai’ Al Mu’awamah: It is the sale of trees for many years.• Gambling and divination by arrows and related things.

4) When the contract involves harm and damage, such as:• Monopoly: When the trader monopolizes the commodities until they run out of the market, and

then increases the prices. This is confirmed by the Hadith of the Messenger of Allah, peace be upon Him, which states: “He who monopolizes something needed by Muslims to increase its price for them Allah, Praise be to Him, will throw him in Hell upside down.” (Narrated by Muslim).

• Sale by a Muslim to undercut and outbid another Muslim: It is when you entice the buyer during the option period to revoke the sale in order to sell him something better or at a lower price, or by enticing the seller to sell after an agreement or consent is mutually agreed with another to bargain for a certain price in order to buy the same thing from him at a higher price. It is also when the buyer is offered a lower price or something better in quality for the same price. This is prohibited according to the following Hadiths of the Messenger of Allah, peace be upon him: “A man should not undercut or outbid his Muslim brother.” (Narrated by Al Bukhari and Muslim). In another story, “A Muslim should not offer a price for something for which a price has been offered by his Muslim brother.” (Narrated by Muslim).

• Bai’ Al Najash: It is making an increase in the price of a commodity offered for sale, without the intention to buy it, but to mislead and deceive others and make them buy it for more than its value. This is forbidden, because of the Hadith of the Messenger of Allah, narrated by Ibn Omar, may Al-lah be pleased with them, which states, “The Messenger of Allah, peace be upon him, prohibited Al Najash sale. (Narrated by Al Bukhari and Muslim).

Do you know?That the first actual ex-periment of Islamic banks in establishing local sav-ing banks was started in the village of Meet Ghamr in rural Egypt in the year 1963. It was launched by Dr. Ahmed Al Najjar, and these banks were based on the system of partici-pation in profit and loss, without charging or giv-ing interest. It was widely welcomed with enthusi-asm by people, so much so that the number of de-positors reached 59,000 within three years of op-eration. However, this ex-periment came to a com-plete halt in 1967.

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• Bai’ Hader Libad: It is when a person residing in a village or city sells to a person living in the desert by acting as broker, etc. and says to the owner of the commodity: “I’m ready to sell it on your behalf on a gradual basis, at a better price.” As a result, people sustain damage and prices become higher for them. This is haram, due to the confirmed Hadith, which says, “A person residing in a village or city should not sell to a person living in the desert.” (Agreed Upon Hadith .

• Intercepting Mounted Passengers: It is intercepting some one who is coming with his commodity to sell it on the market and telling him that the market is slump. This convinces the owner of the com-modity to sell it at a price that involves gharar, and then the buyer re-sells it at the price he offers. This is haram, because it involves injustice and damage to the seller and the people, and because of the sound Hadith: “Do not intercept mounted passengers.” (Agreed Upon Hadith).

• Fraud: It is the sale involving a defect in the sold commodity or inherent defect or an obvious defect that is covered up by way of fraud, or fraud in price or counterfeited money or consideration. This is because of the Hadith, which says, “He who cheats us is not from us.” (Narrated by Muslim). It is also due to the Hadith, “A Muslim is the brother of his fellow Muslim. It is not lawful for a Muslim to sell a commodity with a defect to another Muslim without pointing it out to him.” (Narrated by Ibn Majah).

• Bai’ Al Mustarsil: It is when the seller sells a commodity to a buyer, who does not have the desire to bargain for it, at a very high price. This is haram, according to the Hadith, “The fraud of Al Mustarsil is haram.” (Narrated by Al Tabarani and Al Bayhqi).

• Bai’ Al Mudhtarr (distress sale): It is when the buyer buys a commodity at a low price from a person who is in need whose situation is known to the seller because he wants to pay off a prompt debt or to settle an adjudged court amount.” Ali, may Allah be pleased with him, said: “The Messenger of Allah prohibited the sale of a person in need.” (Narrated by Abu Dawood).

5) When the Sale Involves a Commodity that Should be Provided Free and for which no Consideration is Allowed: It is the sale of water, grass and fire, because people are own-ing them in common. The same also applies to giving on loan a he-animal for fertilization against consideration. No sale contract may be concluded for anything that is prohibited to sell because it should be provided and made readily available free of charge.

6) When the Sale Involves What One Does Not Own: It is like selling a commodity that is pos-sessed by others, the sale of human body organs, and the like.

7) Sale Involving Riba or the Trick for Riba: It is like Al ‹Ina sale, i.e. selling the commodity against deferred payment, and then buying it at a lower price from the person who bought it.

8) When the Sale Involves Something That Has No Benefit: It is like selling insects, unless there is benefit in them.

Sales in Islam

Chapter II

Famous quotesThe immunity shown by Islamic banks in the face of the recent sweeping global crisis has height-ened the attention by Westerns in general, and Europeans in particular, to the Islamic financial and banking system, particularly when until recently they were sur-prised that such banks are established. As a result, Swiss and U.S. banks are now expand-ing the scope of their Is-lamic financial services and products (Ebrahim Mohammed, German media and economic expert).

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The Messenger of Allah, peace be upon Him, says, Traders come on the Day of Judgement as transgressors, except for those who feared Allah and were truthful and pious.” (Narrated by Al Tirmithi).

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It is estimated that the number of Islamic financial institutions worldwide are more than 300, including commercial banks, investment companies and insurance companies. These institutions are located in around 75 countries, and they are growing at a rate ranging between 15% and 20% percent per annum.

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Conventional BanksIslamic BanksArea of Difference

1. Dealings are governed by local laws and internation-al customs and practice without any regard to Islamic Shari’a principles.

2. Usury or interest is considered the basis of dealings. Contracts also include riba, gharar, ignorance and gambling.

1. Dealings are Shari’a-compliant; all deal-ings, services and products are based on the principles of Islamic Shari’a.

2. They are based on religious principles that riba (usury) is haram (unlawful), based on texts from the Qur’an and Sunna.

Dealings

They do not pay any attention to reform to the commu-nity, and this is completely ruled out in their dealings.

One of their responsibilities is to spread Islamic da’wah (guidance) by translating the Islamic economic thought into a tangible living reality.

Service of the Economy

1. They contribute to the development of major capitalist communities rather than their local communities.

2. They contribute to the widening gap between the poor and the rich (the rich become richer, and the poor become poorer)

3. They do not contribute to social development (they do not offer interest-free loans or Zakat). Some of them make annual donations on an individual and statutory basis.

4. They concentrate on major customers and traders (high net worth individuals) more than others, with small cus-tomers and traders receiving little attention from them.

1. They contribute to the development of their local communities.

2. They encourage distribution of income and wealth justly and fairly in their local communities.

3. They contribute to social development based on Shari’a and religious prin-ciples through Qard Al Hasan (interest-free loans, donations and Zakat).

4. They pay attention to craftsmen, self-em-ployed professionals and small traders).

Development

Differences Between Islamic Banks and Conventional Banks

Chapter III

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Conventional BanksIslamic BanksArea of Difference

They do not pay any attention to morals and values if they do not serve their main objectives. They charge interest for delay and prosecute defaulting borrowers and insolvent and even bankrupt customers and also repossess prop-erties, including private houses and finance prohibited products.

They are based on integrity, honesty and forgiveness (adherence to values, morals and good conduct).

Ethics

1. Dealings are based on the principle that cash begets cash.

2. Dealings are not limited to available cash, based on usury and interest, leading to hiking prices and eco-nomic inflation, followed by economic slump.

3. Dealings mainly involve lending and borrowing, based on interest. There are no actual transactions involving sale and purchase.

4. There are no differences between good and bad things. Most investments involve prohibited activities or those which are repugnant to Islamic Shari’a and public morals.

1. They are based on the following prin-ciples:

2. Riba is unlawful.3. Money grows through exchange and

trading.4. Dealings are limited to available cash,

and this prevents or reduces the risk of economic inflation.

5. Dealings are not based on borrowing and lending, and all offerings of Islamic banks are based on actual sale and purchase, i.e. exchanging money for commodities.

6. Dealings involve lawful products and services, and money is not employed in unlawful and prohibited products and services.

Basics of Cash Deal-

ings

22

Conventional BanksIslamic BanksArea of Difference

There is no SSB or internal Shari’a audit department in-specting and checking the bank’s offerings, transactions and documents.

There is a Shari’a Supervisory Board (SSB) comprising a number of reputable schol-ars who vet, check and inspect the bank’s offerings, transactions and documents. There is also an internal Shari’a audit de-partment which checks transactions from a Shari’a point of view.

Control

1. Money invested through one method: interest-based loan.

2. Receive depositors’ funds on the basis of interest fixed in advance on the principal amount, with the main objective being to make profit through unlawful interest charged on amounts extended to borrowers.

1. Money invested through legitimate and lawful instruments, including Muda-raba, Musharaka, Murabaha, Istisna’, Salam, Ijarah with the promise to own and Tawarruq).

2. Receive depositors’ funds on a Muda-raba basis (participation in profits) by investing investors’ funds in lawful transactions and based on specific services and dealings, in which profit is distributed proportionately.

Money Investment Methods

Do not bear risks involved in trade and investment, since they only engage in lending and borrowing transactions.

Bear risks of trade and investment (profit and loss) through sale, purchase, Ijarah and such other investment transactions.

Risk-Taking

Differences Between Islamic Banks and Conventional Banks

Chapter III

23

Allah, the Almighty, says, “Allah commands you to render back your trusts to those to whom they are due; and when you judge between people, that you judge with justice.” (Surat Al Nisa’- Verse: 58).

24

Allah, the Almighty, says,“Who is he that will loan to Allah a beautiful loan, which Allah will double unto his credit and multi-ply many times? It is Al-lah that gives you want or plenty, and to Him shall be your return.(Surat Al Baqara - Verse: 245).

The Messenger of Allah, peace be upon Him, says,“If one of you extends a loan, and he is given a gift or an animal to ride, he should not accept it or ride the animal, unless the transaction was con-cluded well before.”(Narrated by Ibn Majah)

First: DefinitionLoan is an extension of a sum of money to someone who has to repay the same amount. This means that the lender extends to the borrower an amount of money, provided that the borrower should return the same amount without any increase. If the lender obliges the borrower to pay an extra amount on settlement, this is considered actual riba.

Second: Rules governing bank loans1. It is prohibited for the bank to stipulate an excess amount on the sum of money when repaid, be-

cause this is a prohibited riba, whether this increase is in the type or amount, and whether this is stipulated in the contract or thereafter.

2. A customer may not provides an asset or consideration to the bank during the loan period if this is for the sake of the loan.

3. The amount may be increased by the borrower on repayment, as a reward to the lender, provided that this should not be a binding obligation or a custom and practice.

4. The bank may charge a fee on the loan equivalent to the actual expenses involved in extending the loan, such as opening the file, studying the customer’s situation and the costs of the study, if undertaken. However, this fee may not be increased, and the actual costs should not include what the customer has nothing to do with, such as staff salaries, rent for premises, transportation charges, etc.

Third: Examples of loan applicationsA) Current account

1. Current accounts are defined as loans from the customer (lender) to the bank (borrower).2. The bank may charge a fee as actual expenses involved in the current accounts for the services

provided.3. The bank may not offer prizes to current account holders, in the form of in-kind gifts, financial ben-

efits, discounts or withdrawals, because this is a prohibited and unlawful interest.4. The fee charged on cash withdrawals made through Automatic Teller Machines (ATMs) from cur-

rent accounts is considered a charge for the service, and this charge should be actually linked to the costs.

B) OverdraftsThe bank may provide an overdraft service (it is a temporary amount provided in the customer’s account in case there are no funds in it), provided that such service should be rendered without interest. Actual costs, if any, may be charged in consideration for the service.

Chapter IV

Loan

25

Fourth: Comparison between Islamic banks and conventional banks in extending loans

Conventional BanksIslamic BanksArea

naoLnaoLContract

Money against money Money against moneySubject of the contract

Usury-based loan against interest.Qard Hasan (interest-free loan).Status in Fiqh

It involves all transactions for the purpose of making profit and trading in

interest.Helping the needy, and therefore the bank does not extend it to all people.Purpose

Usury-based interest is charged.No profit or interest is charged,Interest and profit

Fees are charged in proportion to the loan, regardless of the actual costs.

Actual fees are charged to compen-sate for the costs incurred.Fees

The bank charges delay penalty, which accumulates and compounds on a

monthly basis.

The bank may not charge the customer penalty on delay in making payment.

However, it may oblige the customer to donate a certain amount of money to charities on delay or when defaulting

on payment.

Delay penalty

26

27

The United Arab Emirates (UAE) is unique in its pioneering Islamic banking experience. It is the first country in the Arab world to approve a law governing Islamic banking transactions (Federal Law No. 6 of 1985 with respect to Islamic banks, finan-cial institutions and Islamic investment companies).

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First: DefinitionIt is the purchase by a bank a certain commodity from the trader (car, house, building materials, etc.) on the customer’s request, and then selling such commodity to the customer at a higher price than that paid for it (the difference between the two prices being the bank’s mark-up in the transaction) while disclosing the actual price and the mark-up amount, after which the customer pays the installments to the bank as mutually agreed.

Second: Steps of Murabaha1. The customer expresses his wish to purchase the commodity he wants to buy (car, furniture, prop-

erty, etc.) and files an application with the bank to obtain finance for the commodity, by providing all the necessary personal details and the price of the commodity.

2. The bank conducts the necessary studies on the customer’s liabilities and his situation, and exam-ines the quotation specified and the specifications of the commodity. If convinced, the bank buys the commodity in any way acceptable according to custom and practice, such as via telephone, facsimile or through the exchange of offer and acceptance notices, or through a sale contract. etc. The bank then pays the price of the commodity to the trader promptly.

3. The bank sells the commodity to the customer at a higher price, through Murabaha, with the differ-ence representing the bank’s mark-up.

4. The customer pays the amount in installments, as mutually agreed. (See the illustrative diagram No. 1)

Third: Most salient rules governing MurabahaA) Before the contract is concluded between the bank and the customer

1. An agreement is reached on Murabaha, either in a percentage in excess of the cost of the com-modity or by way of an amount added to the actual cost.

2. If customer pays an amount of money as advance or earnest money to the trader or owner of the commodity, this is considered a conclusion of the sale contract, in which case the bank may not purchase the commodity and sell it to the customer except after the exclusion of the first sale concluded through the advance payment or earnest money between the customer and trader. This is done when the trader or the owner of the commodity excludes the customer from the sale and considers it non-existent, and then the bank buys the commodity.

3. The bank may take from the customer a promise to buy the commodity from the bank before the bank owns it. Similarly, the customer may take a promise from the bank to sell the commodity to him after the bank owns it. In both promises (mutual promise), it is stipulated that they should not be binding except after the bank enters into the transaction. However, if the promise is unilateral,

The Messenger of Allah, peace be upon Him, says,“Default in payment on the part of a solvent debtor is unjust.” (Narrated by Al Bukhari).

Hakim Ibn Huzam said, “I said: O Messenger of Allah, I buy commodi-ties, what are permissi-ble and what are imper-missible?” He said: “If you buy something, do not sell it until you pos-sess it.”(Narrated by Al Bukhari)

Chapter V

Murabaha to the Purchase Orderer

29

Do you know?The word “bank” is derived originally from the word “ban-co”, which in Italian means the “counter” or “table,” be-cause Italian money changers used to exchange money for customers using this “counter” or “table.”

No. (1) Practical Steps of Murabaha

then it may be binding.4. It is preferable, from a jurisprudence aspect, to

reduce to writing the promise, contract and ex-clusion and such other agreements which arise between the contracting parties. Practically, writ-ing is a must in order to safeguard rights.

5. The bank may charge a fee or commission, at a certain percentage, in consideration for open-ing the file and for conducting the studies and to compensate for the actual costs incurred. Such fee or commission is considered a charge for the effort made preceding the purchase, provided that such charge should be actual and not ex-orbitant.

6. The bank may obtain a security from the custom-er as a mortgage for the purchased commodity or another commodity as guarantee for good performance or as salary transfer, etc.

7. The purchased commodity should be permitted in Shari’a, otherwise the bank may not purchase and sell it.

8. The bank may take an amount of money before and after the contract, and such amount is con-sidered as follows:

• If it is before the Murabaha contract, it is an ‘ar-bun (earnest money). If the customer backtracks on the transaction, the bank may deduct from the amount the actual damages and then return the balance to the customer.

• If it is after the Murabaha contract, it is an ear-nest money, and if the customer backtracks on the transaction, the bank may take the earnest money.

30

B) Conclusion of the contract 1. It is prohibited for the bank to conclude a Murabaha contract before buying the commodity from

the trader or the original owner of it.2. The bank’s approval of the purchase of the commodity and the trader’s consent to this through any

means of recognized communication is considered a valid purchase and possession, even if the commodity (car or building materials) remains in the trader’s stores, because the purchase has been concluded by way of consent, which involves a transfer of the commodity to the bank, and the bank bears the responsibility for destruction of the commodity.

3. The Murabaha contract may not be revised after it is concluded, except by way of consent of both parties. However, before it is signed, the contract may be revised.

4. If the bank buys a commodity and is destroyed, the bank shall become responsible for it, and the customer may not be considered responsible for its price except after the title thereto is transferred to the customer after the contract is signed between the two parties.

5. The documents (quotation and invoice) should be in the bank’s name and addressed to it, and not in the customer’s name.

6. The bank shall bear the cost of insurance for the commodity. After that, the bank may charge the cost to the customer and add it to its Murabaha mark-up.

7. The bank should disclose in the contract the price of the commodity which it bought to the cus-tomer. In addition, it should disclose the discount in the price it has obtained to benefit the cus-tomer from such discount.

8. The bank should disclose to the customer in the contract all the expenses, fees and profits charged to the customer. The bank may only add the actual costs, such as insurance, storage and fee for opening the account, etc. The customer may not be charged staff salaries or the costs of advertisement, etc.

9. The bank may stipulate that it shall bear no liability for defects in the commodity and that if such defects are discovered in it, the customer may have recourse against the seller.

10. Registration of the title to the commodity in the customer’s name may be deferred until the price is paid in full, while the customer’s right to the commodity is recognized and established.

11. It is prohibited for the bank to increase the amount of the transaction or its installments due to the customer’s delay in payment of the installments, because this is a prohibited riba. However, the bank may oblige the customer to pay a certain amount to charities in case of delay in payment, and the bank channels such amount to charitable organizations with the SSB’s knowledge.

12. The bank may not charge extra amounts to the customer when the Murabaha installments are extended, in what is called “debt rescheduling.” However, it may deduct the actual costs incurred in this process, and such costs should be in the form of a fixed amount.

Do you know?The first bank to offer Is-lamic financial services in Britain was the “Islamic (Bank of Britain), which was established in 2004. One of the amazing things is that the first customer to open an account with one of the bank’s branches in the city of Leicester was a non-Muslim, who covered more than 100 miles to open an account with the bank, due to the transparency and ethics he found in it. The bank has now on its books more then 35,000 custom-ers and eight branches in Britain.

Chapter V

Murabaha to the Purchase Orderer

31

Fourth: Comparison between Murabaha transactions in Islamic banks and financing loans in conventional banks

Area Murabaha in Islamic Bank Loan in Usury-Based Bank

Contract A sale contract, in which profit is permissible A loan contract involving a usury-based in-crease

Subject of the Contract Commodity in exchange of cash Cash in exchange of cash

Profit Fixed and not variableThe bank charges the stipulated usury-based increase, and also charges an excess amount for delay in payment of the installments

Title

The bank owns the title to the commodity be-fore it sells it to the customer and then the title is transferred to the customer after sale

The bank does not own the commodity

SecurityThe bank bears responsibility for the com-modity and for its destruction after it buys, and before it sells, it

The bank does not bear responsibility for the commodity or for its destruction

Fees Administrative fees Administrative fees

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First: Definition

Musawama (bargaining) is selling the commodity by the bank to the customer after owning it, without being obliged to disclose its original price and the bank’s profit. It is the recognized profit known on the markets and among traders, etc. Musawama is governed by all the rules of Murabaha. However, it is different from it because in Musawama the bank is not obliged to disclose the commodity price paid by the bank and its profit, costs and fees, unlike Murabaha, where the bank is obliged to disclose them.

Second: Comparison between Murabaha and Musawama sales

Musawama Sale ContractMurabaha Sale ContractArea

Musawama sale contractMurabaha sale contractContract

It should not be disclosedShould be disclosedDisclosure of the price of the com-

modity, purchased by the bank, inthe contract

It should not be disclosedShould be disclosed Disclosure of the bank’s fees andexpenses in the contract

Chapter VI

Musawama (Bargaining)

33

Famous quotesIslamic economics is an application of Shari’a rules which prevent injustice in the possession of financial resources and disposal thereof for the sake of satisfaction of individuals and enabling them to fulfill their duties towards Allah and the community.(Hassan Zaman, awarded Islamic Development Bank’s Prize in Islamic Economics).

The structural crisis witnessed by the world economy at present is due to the brutal liberal leadership of the economy. The current situation is on the verge of a volcano, which may erupt under the pressure of the double crisis (debts and unemployment). To get out of this crisis and regain balance again, two things should be done: reducing interest rates to near zero and revising tax rates to nearly 2%, which is completely consistent with the annihilation of riba and the Zakat rate in the Islamic economic system. (Maurice Allais, awarded the Noble Prize in Economics).

36

First: DefinitionTawarruq: It is the purchase of a commodity for a deferred price, either through Musawama or Murabaha, and then selling it to somebody else to obtain cash against a spot price.

‘Ina sale: It is the purchase of a commodity against a spot price and then selling it to the person who sold it, for a lower price.

Second: Comparison between Tawarruq and ‘Ina

Area Tawarruq ‘Ina

Purpose Obtaining cash Obtaining cash

Purchase of commodity and own-ing it

Purchase and ownership is achieved Purchase and ownership is achieved

Sale of commodity To a third party To whoever sold the commodity

Number of parties to the transac-tion

3 parties 2 parties

Shari’a rule Permissible Impermissible

The Messenger of Allah, peace be upon Him“When people become stingy with dinars and dirhams, and trade with ‘ina [a ruse attempting to bypass riba] and follow the tails of cows, and abandon jihad in the path of Allah, Allah will send down upon them a calamity [in one narration : a humiliation] which He will not lift until they re-examine their religion [in one narration : until you return to your religion] (Narrated by Ahmed)

Chapter VII

Tawarruq (Monetization)

37

No. (2)- Practical Steps of ‘Ina Sale No. (3)- Practical Steps of ‘Simple (Jurisprudence) Tawarruq

Third: Steps of the prohibited ‘Ina SaleCustomer (A) wishes to obtain an amount of BD 5,000, for example. He asks (B), who is a seller, to provide him with this amount. Party (B) consents, but by way of an ‘Ina sale, which is conducted as follows:1. Person (A) sells (B) a car, for example, for BD 5,000.2. The Person (B) buys the car and pays the amount to

the person (A).3. The Person (B) sells the same car once again to (A)

for BD 4,000, which he pays in installments or as a deferred price entirely.

(See illustrative diagram No. (2))

Fourth: Practical Steps of Simple (Jurisprudence) Tawarruq It is the Tawarruq which is executed in the retail sector, and was practiced in olden times, and is currently in use. Examples of it are:

A customer wishes to obtain the amount of BD 5,000, for example, and he conducts a Tawarruq transaction through the following procedures:

1. The customer buys a commodity from the seller (1) for the amount of BD 6,000 as a deferred price.

2. The customer sells the commodity to the seller (2) for the amount of BD 5,000 in cash money.

(See illustrative diagram No. (3))

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Allah, the Almighty, says,“O you who believe! Devour not usury, doubled and multiplied; but fear Allah; that you may really prosper. And fear the fire, which is prepared for those who reject faith, and obey Allah, and the Messenger that you may obtain mercy.”(Surat Al-‘Imran – Verses 130-132)

No. (4)- Practical Steps of Organized Tawarruq

Fifth: Contemporary TawarruqIt is the Tawarruq executed in the banking sector by many Islamic banks. It is of two types:

A) Organized Tawarruq: The transaction is executed as follows:A customer wishes to obtain the amount of BD 5,000. The bank consents to provide him with this amount through Tawarruq, as follows:1. The bank buys a commodity worth BD 5,000

from a trader.2. The bank sells the commodity to the custom-

er, by way of Murabaha, for the amount of BD 5,500, for example, with the difference being the bank’s profit.

3. The customer authorizes the bank to sell the commodity for his account, and then the trad-er hands over the amount to the customer.

4. The customer pays the amount to the bank in installments.

Note: The bank is a party to all contracts (See illustrative diagram No. (4))

B) Advanced TawarruqIn view of the many shortcomings of the previously mentioned Tawarruq, certain changes have been made to the process in order to avoid suspicions about Shari’a compliance, according to the follow-ing example: A customer wishes to obtain BD 500 from the bank, and so the bank conducts the following Ta-warruq transaction:

1. The bank buys a commodity from trader (1) through an agent, worth BD 500.

2. The bank sells the commodity to the custom-er, by way of Murabaha, for an amount of BD

Chapter VII

Tawarruq (Monetization)

39

7,000, the difference being the bank’s mark-up.3. The customer sells the commodity to trader (2)

through one of two following methods:• Authorizing the same agent to sell the commodity.• Receiving the commodity himself and selling it and

collecting its price.4. The customer pays the amount of the transaction to

the bank in installments.(See illustrative diagram No. (6))

C) Tawarruq in International CommoditiesIt is the Tawarruq that is conducted by the bank to pro-vide liquidity to certain customers (mainly companies). This type of Tawarruq is conducted outside the coun-try, because the size of local commodities is not large enough for the transactions which are worth millions of dinars. This Tawarruq is conducted as follows:

1. The customer applies to obtain a certain amount of money (e.g. BD one million). The bank buys a com-modity on the international markets (metals, for ex-ample) from trader (1) through an overseas agent worth BD one million.

2. The bank sells the commodity to the customer by way of Murabaha, worth BD 1,100,000 (One million one thousand), the difference being the bank’s mar-ket up.

3. The customer sells the commodity to trader (2) by authorizing an overseas agent (the same agent pre-viously mentioned, or another agent) to do so.

4. The customer pays the amount of the transaction to the bank in installments.

(See illustrative diagram No. (6))

No. (6)- Practical Steps of Tawarruq in International CommoditiesNo. (5)- Practical Steps of ‘Advanced Tawarruq

40

Sixth: Differences between various Tawarruq applications

AreaJurisprudence Ta-

warruq Organized Tawarruq Advanced Tawarruq Tawarruq in Interna-tional Commodities

Suspicions about compliance with

Shari’aFree of suspicions There are suspicions Free of suspicions There are suspicions

Place Local market Local market Local market Overseas market

Type of commod-ity (mostly) Any commodity Diamonds, oil or any

other commodity

Diamond, oil or any other commodity Metals (aluminum, zinc,

platinum, copper, etc).

Collecting the commodity

The customer collects the commodity and sells it himself and receives

the price

The customer may receive the commodity and sell it himself and

receive the price

The customer may receive the commodity and sell it himself and

receive the price

The customer may not receive the commodity

and sell it

Number of sellers Two sellersOne seller and some-

times two Two sellers Two sellers

Authorization Not available

The customer autho-rizes the bank to sell the commodity to trader (2) and pay the price to the

customer

The customer autho-rizews an independent

company to sell the commodity on his

behalf

The customer autho-rizes an independent company to sell the commodity on his

behalf

Chapter VII

Tawarruq (Monetization)

41

Do you know?The origin of the word “bourse” is derived from the name of the Belgian family of Van Der Bours-en, which was working in the banking sector. It was agreed that the hotel owned by this family in the city of Bruges would be the venue for a meeting by local traders during a certain period in the 15th century. With the passage of time, the hotel became a symbol of the market and capital and bourse of the commodity. The first publication by it was sim-ilar to a list of the prices of the bourse during the entire period of trading for the first time in 1592 in the city of Anvers.

Seventh: Rules governing TawarruqEnsuring that the purpose of Tawarruq is not repugnant to the precepts of Islamic Shari’a.The commodity should be:Specified and distinct from other commodities, with an allocated number and price.Ensuring that the commodity is received, either actually or constructively.The commodity should be permissible.Sale of the commodity to other than the seller from whom it was bought through de-ferred sale (third party) and ensuring that it does not revert to the first trader.There should not be any link between the first purchase price and the second pur-chase price.The customer should not authorize the bank or its agent to sell the commodity he purchased from it.

42

I believe that we need more during this crisis to read the Qur’an rather than

the Bible in order to understand what is happening to us and to our banks,

because if those responsible for our banks tried to respect the teachings and

rulings in the Qur’an and implemented them, the crises and disasters which

have befallen us would not have taken place, and we would not have reached

this miserable situation.

(Bovis Vanson, Chief Editor of the Magazine “The Challenger.”)

43

44

First: DefinitionThe documentary credit is a written undertaking issued by a bank (known as the issuer) on the request of the buyer (the applicant customer or orderer) in favour of the beneficiary or the foreign supplier, whereby the Bank undertakes to pay up to a specified amount within a certain period of time, on the condition that the seller present documents for the goods conforming to the instructions contained in the terms and conditions of the credit.

Second: Parties to the documentary creditThere are four parties to the documentary credit, namely:

1. The Buyer: The customer who applies to open the credit. The credit is usually in the form of a contract between the customer and the bank opening the credit.

2. The bank opening the credit: It is the local bank to which the buyer submits an applica-tion to open the credit, where the bank studies and processes the application.

3. Beneficiary: The exporter which implements the conditions of the credit within its valid-ity period.

4. The correspondent bank: It is the overseas bank which notifies the seller (the benefi-ciary or the overseas supplier) of the documentary credit received by it from the issuer of the documentary credit.

Third: Shari’a rules governing documentary creditA) General Rules1. Dealing in documentary credits involve the following:

a) An agency to provide procedural services, mainly examination of the documents.b) Guarantee secured by the bank to the importer. Both are permissible, and so the

documentary credit is permissible.2. The bank may open documentary credits of various types in any form of execution

(See Fourth).3. The bank may not deal in documentary credits if such credits involve goods which are

prohibited or involve transactions based on usury, both taking and giving.

he Messenger of Allah, peace be upon Him, says:“An honest trader who is a man of truth will be (on the Day of Judgement), with the Messenger of Allah, truthful and martyrs.”(Narrated by Al Tirmithi).

Allah, the Almighty, says,«O you who believe! Fulfill all obligations». (Surat Al Ma’idah- Verse 1)

Chapter VIII

Documentary Credit

45

B) Fees and commissions1. The bank may charge the actual costs incurred in processing documentary credits, and it may also charge fees

for the services provided, whether as a lump sum, a fixed amount or as a percentage of the documentary credit. The fees include amendments to the credits, except for amendments by way of increasing the term of the credit, where the bank may not charge except the actual costs only, and in this case it should be a lump sum and not a percentage.

2. A table of fees may be devised for opening credits, with variable amounts according to the amounts of the credit, if the credit includes activities that differ according to the changing value of the credit.

3. No commission may be charged as a parentage in case of confirmation of the credit issued by another bank. In this case, the commission should be limited to a certain amount representing the actual costs incurred in confirma-tion, because confirmation of the credit is a pure guarantee.

Case Rule

Credit fees May be charged

Credit amendment fees May be charged

Increasing the credit tenor Actual costs only may be charged, as a fixed amount

Confirmation of the credit Actual costs only may be charged, as a fixed amount

Do you know?The first organized bank was established in the city of Venice in Italy in the year 1157 A.D.

46

Fourth: Types of documentary creditA) Fully- funded documentary credit (cash credit)Shari’a Rules1. What is meant by the funded credit is that the amount of the commodity is available with

the customer, and hence there is no need for the bank to buy the commodity. In this case, the bank’s role is limited to the facilitation of trading and correspondence between the buyer and the seller acting as agent.

2. The bank may charge a fixed fee or commission as a percentage of the amount for the agency, without the guarantee, so that the guarantee is not taken into account when charging the customer such fee.

Steps of the fully funded credit (cash credit) (see illustrative diagram No. (7))

1. The seller (overseas supplier) enters into a contract with the buyer (bank’s customer) to ex-port a certain commodity, and the buyer undertakes to pay the price through a documentary credit because there is no relationship between the two parties, particularly because they are in two different places.

2. The buyer requests the bank to open a documentary credit in favour of the seller, specifying the conditions reached between him and the seller.

3. The bank vets the customer’s request, and after consent and specifying the terms and con-ditions, it issues the credit and forwards it to the correspondent bank in the seller’s country.

4. The correspondent bank notifies the beneficiary seller of the credit.5. The seller (beneficiary) hands over the documents and the shipping documents to the cor-

respondent bank, which pays him the price of his commodity after verifying that the docu-ments conform to the terms and conditions of the credit.

6. The correspondent bank sends the documents to the bank with which the credit was opened by the buyer (customer).

7. The issuing bank in the buyer’s country hands over the documents to the customer against payment, as agreed between them.

8. The seller (beneficiary) hands over the commodity to the customer using any means of ship-ment (air, vessel, truck, etc) as well as the shipping documents.

9. The customer hands over the documents to the agent of the shipping company at the port of arrival, who in turn hands over to him the commodity. The issuing bank and the correspon-dent bank arrange payment between them, so that the transaction is completed.

The Messenger of Allah, peace be upon Him, says,“What Allah has made lawful in his Book is halal, and what he has made unlawful is haram, and what he is silent on is forgiven. Therefore, accept forgiveness from Allah, because he is not forgetful.” (Narrated by Al Hakim).

Famous quotesIt is anticipated that the Islamic finance system will rebuild the reputation of a capitalist system that has proved a total fiasco. The Islamic financial system is able to contribute to the rebuilding of the Western financial system (Vita E Pensiero).

Chapter VIII

Documentary Credit

47

B) Non-funded documentary credit (Murabaha credit)It is the documentary credit under which the custom-er does not own the amount of the commodity, and so he seeks finance from the bank. This documen-tary credit is implemented by Islamic banks by way of Murabaha.

Shari’a rules governing non-funded documentary credit (Murabaha)The documentary credit by way of Murabaha is im-plemented when the bank buys the commodity in its name and for its own account from the overseas supplier upon the customer’s request, with a promise from the latter to buy the commodity later from the bank. The bank bears the risk of the destruction of the commodity in transit before it is delivered, and when it arrives, the bank sells it to the customer by way of Murabaha.

Under Murabaha credit, certain requirements should be fulfilled in order for it to be Shari’a-compliant, in-cluding the following:

1. If the seller and the buyer conclude the contract before opening the credit, the contract between the buying customer and the seller should be cancelled, and a new contract concluded between the bank and the overseas seller. If the orderer receives the commodity subject of the contract, no documentary credit may be opened for this commodity.

2. The bank should be the buyer from the beneficiary (seller), after which it sells the commodity to the buy-ing customer by way of Murabaha.

3. The buying customer should apply for funding from the bank by way of Murabaha before the bank opens

Do you know?A study conducted by the Islamic Development Bank predicted that 80% of banks in the Arabian Gulf region will convert into the Islamic financial banking system by the year 2015.

No. (7) Practical Steps of the Funded Documentary Credit (Cash)

48

the documentary credit in its name and before it concludes the original sale contract with the beneficiary (seller).

4. The contract to buy the commodity from the seller should be concluded with the bank itself; the credit should also be opened in the bank’s name, because it is the buyer from the seller, and not the customer.

5. The Murabaha contract should be concluded between the bank and the buying customer after the commodity arrives and the bank receives the documents.

6. The bank may not ask the buying customer to pay a commission for opening the credit in the case of Murabaha-funded credit, because the bank opens the credit in its favour as buyer of the commodity. However, the bank may add the actual costs related to opening the credit to the overall expenses; it may also charge the buyer a commission for opening the credit by including it in the costs if the credit is opened with another bank.

Steps of Murabaha-funded documentary credit (see illustrative diagram No. (8))1. The buyer (overseas supplier) agrees initially with the buyer (bank’s customer) to export a certain

commodity.2. The buyer asks the bank in writing to open a documentary credit in the bank’s name to buy the

commodity agreed upon with the seller, specifying the conditions on which the customer agreed with this seller. The customer promises the bank to buy the commodity when it arrives. On this basis, the bank contacts the seller to conclude a transaction to import the commodity and own it.

3. The bank vets the customer’s request, and after it consents to the customer’s request, it specifies the terms and conditions and issues the documentary credit and sends it to the correspondent bank in the seller’s country, in addition to a statement by the bank of its purchase of the commod-ity.

4. The correspondent bank notifies the beneficiary seller of the credit opened in the name of the bank opening the credit.

5. The seller sends the commodity to the bank by using any means of shipment (air, vessel, truck, etc.) together with the shipping documents (bill of lading).

6. The seller (beneficiary) hands over the shipping documents to the correspondent bank which pays him the price of its commodity after verifying the documents and ensuring that they conform to the credit terms and conditions (the documents should be addressed to the bank opening the credit).

7. The correspondent bank sends the documents to the bank opening the credit.8. The issuing bank hands over the documents to the buyer in the buyer’s country.9. The buyer notifies the bank in writing of its receipt of the commodity conforming to the specifica-

tions and free of any defects. The bank sells the commodity to the buying customer by way of

The Messenger of Allah, peace be upon Him, says,“No one has ever eaten any food that is bet-ter than eating what his hands have earned. And indeed the Messenger of Allah, Dawood, would eat from the earnings of his hands.»( Narrated by Al Bukhari).

Chapter VIII

Documentary Credit

49

The Messenger of Allah, peace be upon Him, says, “No one has ever eaten any food that is better than eating what his hands have earned. And indeed the Messenger of Allah, Dawood, would eat from the earnings of his hands.” ( Narrated by Al Bukhari).

50

Murabaha.10. The correspondent bank pays the price to the trader.11. The customer pays the installments due from him.

C) Partially-funded documentary creditIt is the credit whereby the customer pays part of the price of the commodity. It is implemented in two meth-ods:

1) Musharaka creditA Musharaka credit is targeted at customers who need assets and equipment to use in their existing activities and projects, but they do not have sufficient resources to import them. In this case, the customer pays part of the amount of the credit, while the bank pays the remaining balance.

A Musharaka credit is implemented in accordance with the following requirements:

• The customer should apply for funding from the bank by way of Musharaka credit before he concludes the original sale contract with the exporting seller.

• A contract may be concluded to buy the commod-ity from the seller as well as opening the credit in the name of any of the two parties, because the two partners under a Musharaka contract may con-tribute work in addition to providing a share in the capital, contrary to Mudaraba in which the Mudarib provides the work.

The subject-matter of Musharaka between the two par-ties is specified, and this can be done in two methods:First: Leasing Method: The bank leases its share of the goods unto the customer.

Do you know?

There are more than 50 professional colleges and institutions offering specialized education in Islamic finance.

Chapter VIII

Documentary Credit

No. (8) Practical Steps of the Funded Documentary Credit (Murabaha)

51

Second: Sale Method: The bank sells its share in the goods to the customer on a gradual basis, until the customer owns the goods entirely, after which the Musharaka is liquidated. However, the bank may sell the goods in one lot, and the customer pays the price in install-ments.• The Bank may charge a commission for opening the credit under the Musharaka-funded

documentary credit, and such commission may be deducted from the Musharaka expens-es as acts and work outside the scope of the contract concluded between the two parties.

• If the equipment is lost before the bank sells its entire share to a partner, such loss shall be divided between the two parties according to the percentage of the respective sharehold-ings of the two parties.

2) Mudaraba CreditThe application of Mudaraba credit is negligible by Islamic banks. This type of credit is suit-able in particular to the finance of customers who are able to work and carry out transactions without having the necessary capital or resources.This method is summed up in that the bank provides the capital necessary to buy com-modities subject of the Mudaraba. The customer markets the commodities and the profit is distributed between the two parties in the percentages agreed upon, and under this method the customer does not need to provide any cash funding to the documentary credit to be opened for importing the commodities as in the case with the Murabaha-funded credit.Under the Mudaraba credit, the following requirements must be complied with:• The customer should apply for funding from the bank by way of Mudaraba credit before he

concludes the original sale contract with the exporting seller.• The contract to buy the commodity from the seller must be concluded with the customer

himself, in his capacity as Mudarib, who enjoys full powers to manage the Mudaraba funds. In this case, the credit is opened in the name of the customer himself, unlike the Murabaha credit whereby the credit should be opened in the bank’s name.

• The profit resultant from this Mudaraba-funded transaction is distributed as agreed upon between the two parties in accordance with a common percentage. Loss shall be borne by the bank entirely, because it is the fund provider.

• The Bank may charge a commission for opening the credit in the Mudaraba documentary credit, and such commission may be deducted from the Mudaraba expenses as acts and work outside the scope of the contract concluded between the two parties.

Famous quotesThe responsibility for the extraordinary situation in the global economy we are living today is a result of the rampant corruption and the speculation wreaking the market, which led to the aggravating economic effects. The balance on the financial markets can be achieved thanks to Islamic finance after the destruction of the Western classification which likens Islamic economics with terrorism(Lorreta Napoleoni, Italian economist and researcher, in her book “Rogue Economics.”)

52

Fifth: Comparison between types of documentary credit

Scope Usury-Based Credit Cash Credit Murabaha Credit Mudaraba Credit Musharaka

Credit

Reasons for funding

Overseas goods

Application for correspondence only, where the amount is avail-

able with the customer

Application for the bank to buy the com-modity and sell it by way of Murabaha to the orderer because the customer does

not have the required liquidity

The customer has the ability to work, but without

any available capital

The customer has part of the

capital

ContractAgency if it is funded and a

loan contract if it is not funded

Service contract Murabaha contract Mudaraba con-tract

Musharaka contract

Bank’s owner-ship Does not own Does not own Should own Does not own Does not own

Prior contract-ing Permissible Permissible Impermissible Impermissible Permissible

Credit Opener Customer Customer Bank Customer Either party

Fees

Certain adminis-trative fees in the funded capital

and interest in the non-funded and partially funded

credit

Fees are charged on the

agency and services

No fees. However, they may be added

to the cost

Fees are charged on the

agency

Fees are changed on the

agency

Chapter VIII

Documentary Credit

53

Scope Usury-Based Credit Cash Credit Murabaha Credit Mudaraba Credit Musharaka

Credit

Applicable rules International rules International

rules

International rules+Murabaha

rules

International rules + Muda-

raba rules

International Rules +Mush-

araka rules

Bank’s profitProfit on the usury-based

loan

No profit Murabaha profit only

The bank is en-titled to the profit as fund provider

The bank is en-titled to the profit as participant in the project or the

goods

Documents “bill of landing, insurance and

invoices”

In the custom-er’s name

In the customer’s name In the bank’s name In the customer’s

nameIn the name of

either party

Destruction of the commodity

The customer bears this risk

The customer bears this risk

The bank bears this risk

The bank bears the risk, except in cases of trespass, negligence or vio-lation of the terms and conditions,

in which case the customer bears

the risk

The two parties bear the risk of

destruction each pro rata its share

54

Ethical instructions which are the centre of focus by Islamic finance may bring banks closer to their customers more than at any time before. In addition, such principles may make these banks have the actual spirit which is supposed to exist with every institution provid-ing financial services. Vatican Journal (L’Osservatore Roman).

55

56

First: DefinitionCollection bills are Murabaha-based sales of goods offered to the bank or those shipped in its favour, without a prior request from it, whereby the bank has the option to accept or refuse the goods re-ceived in its favour, with full freedom to sell them to any customer it deems suitable, but without the obligation to sell them to a certain customer.

Second: Steps of collection bills Collection bills are of two types:A) Fully-funded collection bills: They are the bills in which the customer owns the entire amount of the goods, and the steps of which are as follows: (see illustrative diagram No. (9))1. The seller (overseas supplier) enters into a contract

with the buyer (bank’s customer) to export a certain commodity, and the customer undertakes to pay the price. Both parties agree on the shipment and insur-ance mechanism, etc.

2. The supplier sends the documents of the goods to the bank without its knowledge, and the bank has the op-tion to accept or turn down the documents.

3. Upon consent, the bank notifies the customer of the arrival of the documents.

4. The customer agrees to the documents sent to him containing the details of the goods.

5. The correspondent bank is notified of the need to advise the exporter of the correspondent bank’s con-sent, and the bank pays the amount of the goods to the correspondent bank.

6. The correspondent bank notifies the importer of its acceptance, and the bank is accordingly paid the amount.

Allah, the Almighty, says,“O you who believe! Fulfill all obligations.(Surat Al Ma’idah- Verse 1)

No. (9)- Practical steps of fully-funded collection bills

Chapter VIII

Chapter IX: Collection Bills

57

The Messenger of Allah, peace be upon Him, says, “He who monopolizes a food for forty nights has nothing to do with Almighty Allah, and Almighty Allah has nothing to do with him.”(Narrated by Ahmed)

No. (10)- Practical steps of non-funded collection bill (Murabaha collection bill)

7. The customer pays the full amount of the goods to the bank.8. The bank charges the customer fees or commissions.B) Non-funded collection bills (Murabaha collection bill)It is the collection bill under which the customer does not own the full amount of the goods, and it is implemented by way of Murabaha through the following steps (see illustrative diagram No. (10))

1. The seller (overseas supplier) enters into an initial agreement with the buyer (bank’s customer) to expert a certain commod-ity.

2. The buying customer notifies the bank of the Murabaha request, and the bank signs an agency contract in which it authorizes the customer to order the commodity on the bank’s behalf. The customer signs a written order for the goods, con-taining the details agreed upon with the overseas exporter. The customer also signs a promise to purchase the commod-ity after the bank buys it.

3. The exporter ships the goods to the bank using any means of transport (air, vessel, truck, etc.)

4. The overseas exporter sends the documents of the goods (in-voices and insurance policy, etc.) in the bank’s name through the correspondent bank.

5. The correspondent bank notifies the bank.6. The bank notifies the buying customer of the arrival of the

documents, and the customer accepts them.7. After the customer’s acceptance of the details of the goods,

the bank sends an advice to the correspondent bank of its acceptance to buy the goods from the exporter, and the price is paid and the commodity bought.

8. The bank sells the commodity to the buying customer by way of Murabaha.

9. When the goods arrive, the customer notifies the bank, in writing, of his receipt of the goods and that they are free of any defects.

10. The customer pays the installments due from him.

58

Third: Differences between the Murabaha-based documentary credit and the Murabaha-based collection bills

Scope Murabaha-Based Documentary Credit Murabaha-Based Collection Bills

MechanismAn agreement is signed for the goods

between the bank, the exporter and the customer

An agreement is signed for the goods between the exporter and the customer

Order of the Good By the bank Without the bank’s request

Order of the Goods By the bank Without the bank’s request

Status in Shari’a The bank is committed to sell the goods to the customer

The goods may be sold to any customer

Authorization There is no stipulation to authorize the customer in agreement with the supplier

It is stipulated that the customer should be authorized in agreement with the exporter

Documents (bills of lading, insurance and invoices)

In the bank’s name In the bank’s name

Contract Murabaha contract Murabaha contract

Guarantee of the commodity It is borne by the bank It is borne by the bank

Fee Fixed fee or commission Fixed fee or commission

Chapter VIII

Chapter IX: Collection Bills

59

Do you know?Six out of the ten companions of the Messenger of Allah promised Paradise are counted among millionaires, and that Abdul Rahman Bin Awf (may Allah be pleased with Him), inherited nearly 65 million gold dinars.

60

Allah, the Almighty, says,“…Surely, you could have charged some fee for it.”(Surat Al khahf- Verse 77)

No. (11)- Practical Steps of Ijarah with the Promise to Own (Two Parties)

First: Definition1. Ijarah: It is the sale of a specific benefit for a speci-

fied period of time.2. Ijarah Muntahia Bittamleek: It is an Ijarah which

is coupled with the promise to transfer the own-ership of the leased property to the lessee (cus-tomer), either at the end of the term of the Ijarah or by stages during the term of the contract. In other words, the lessor (bank) promises the les-see (customer) to transfer the ownership of the commodity or leased property at the end of the term of the Ijarah or during any period agreed upon. On the other hand, the lessee (customer) promises the lessor (bank) to own the commodity or property at the end of the term of the Ijarah or during any period agreed upon.

3. Specified Ijarah: It is the forward Ijarah, i.e. the lessor (bank) is obliged to hand over a described property very clearly and specifically to the les-see (customer) during a specific period of time.

Second: Steps of Ijarah Muntahia Bittamleek or Described Ijarah (Forward Ijarah)A) Ijarah Muntahia Bittamleek: It has two cases1) Ijarah between two parties: In other words, the property or the leased asset is owned by the same customer wishing to obtain finance and to conduct an Ijarah process involving his property. Under this type of Ijarah, the customer wishes to obtain financial liquidity for various purposes, such as pur-chase of a certain land or to construct a building or to pay off debts, etc. In such cases, when the

Chapter X

Ijarah with the Promise to Sell and Forward Ijarah

61

bank buys the leased property, it pays its value in cash to the customer, and the customer benefits from the amount for his own purposes. The bank then leases the property unto the customer, according to the following example: (See illustrative diagram No. (11))

A customer has applied to the bank to obtain BD 100,000 (Bahrain Dinars one hundred thousand) to pay off his debts. The customer owns a property worth BD 100,000 (Bahrain Dinars one hundred thousand), more or less. The process is carried out as follows:

1. The bank buys the property from the customer for BD 100,000 and pays the amount in cash to him, and the customer utilizes the amount for his own purposes.

2. The bank leases the property unto him by way of Ijarah with the promise to own.

3. At the end of the period, the bank sells the property to him or donates it to him.

2) Ijarah between three parties: Under this type of Ija-rah, the property or the leased asset which the customer wishes to own is owned by a third party, and the cus-tomer wishes to acquire the property or the leased asset. The process is carried out as follows: (See illustrative diagram No. (12))

1. The bank acquires the leased asset by buying it from its original owner.

2. The bank leases the asset unto the customer wishing to own by way of Ijarah with the promise to own.

3. At the end of the period, a sale contract or a donation contract is concluded whereby the bank transfers the title to the asset to the customer.

The Messenger of Allah, peace be upon Him, says,

«Pay the worker for his work before his sweat gets

dry.»

(Narrated by Ibn Majah).

No. (12)- Practical Steps of Ijarah with the Promise to Own (Three Parties)

62

B) Described Ijarah (Forward Ijarah)This Ijarah is implemented as follows: (See illustrative diagram No. (13))

1. A described (forward) Ijarah contract is con-cluded between the bank, as lessor, and the customer, as lessee, whereby the bank under-takes to hand over to the customer the prop-erty or leased asset agreed upon according to certain specifications and the agreed upon term and amounts (on account) received dur-ing this period. The bank also agrees with a contractor to make the property or lease ready for use.

2. An Ijarah contract with a promise to own is concluded after the property or asset agreed upon is made available and ready for use, and the bank becomes entitled to the actual rent.

3. At the end of the lease period, a sale or do-nation contract is concluded by the bank to transfer the title to the lessee.

Famous quotesThere are many reasons behind the success of Islamic banks in minimizing the losses during the global financial crisis, mainly wcompliance by Islamic banks with the principles of Islamic Shar-ia which prohibit usury and do not rely on bank loans.The Russian RBK Daily( newspaper)

No. (13)- Practical Steps of Described Ijarah (Forward Ijarah)

Chapter X

Ijarah with the Promise to Sell and Forward Ijarah

63

Third: Comparison between the three types of Ijarah

Scope Ijarah with the promise to own (two parties)

Ijarah with the promise to own (three parties) Described (Forward) Ijarah

Purpose Obtaining liquidity (cash) Acquiring house or property Acquiring house or property

Subject of the contract

Readily available land or property or anything suit-

able for lease

Readily available land or property or anything suitable

for lease

Unspecified land or property not ready or anything that can be obtained from the

market

Bank’s ownership Required Required Not required on sighing the contract

Ijarah Term Should be more than one year Unlimited Unlimited

RentBegins to accrue im-

mediately after the Ijarah contract

Begins to accrue immediately after the Ijarah contract

It is permissible to take it before the de-scribed thing is made ready and after the Ijarah contract with the promise to own is concluded. However, rent may be taken

on account

Transfer of titleTransferred to the customer at the end or after the expiry

of at least one year

Transferred to the customer at the end of the contract or at

any time before that

Transferred to the customer at the end of the contract or at any time before that

Major maintenance Borne by the bank Borne by the bank Borne by the bank

Periodical mainte-nance Borne by the customer Borne by the customer Borne by the customer after the asset is

made ready

Insurance Borne by the bank Borne by the bank Borne by the bank

Guarantee of the asset

Borne by the bank except in case of trespass or

negligence or when the customer violates the condi-

tions

Borne by the bank except in case of trespass or negligence or when the customer violates

the conditions

Borne by the bank except in case of tres-pass or negligence or when the customer

violates the conditions

Payment of the rental in advance Not required Not required

Not required to be expedited so long as the lease is not executed according to the

contract of Salam

Destruction of asset Ijarah terminates Ijarah terminates Ijarah does not terminate, and the bank is

obliged to provide another asset

64

Fourth: Shari’a rules governing IjarahA) General rules1. In principle, the Ijarah contract is executed for an asset owned by the lessor (the bank). However, it

is for a customer to request the bank to acquire an asset and then leases it unto him and ultimately transfers it to him.

2. It is permissible for the bank to require the lessee customer to pay a sum of money to the bank to guarantee the customer’s commitment to accepting a lease on the asset and the subsequent obli-gation, provided that no amount is to be deducted from this sum except in proportion to the actual damage suffered by the bank if the customer breaches his promise. It is permissible to agree with the customer, upon the execution of the contract of lease, that this amount shall be treated as an advance payment of the installments of the lease rental.

3. The asset or usufruct may not be leased out before it is owned by the bank.4. If the bank buys the asset from the lessee and then leases it unto him (as in Ijarah between two par-

ties), a certain period of time should elapse during which the leased asset or its value changes. This period is estimated at one year at least, in order to avoid the ‘ina sale.

5. The lessee customer may enter into a sub-lease contract with any party other than the owner for a rental unless the bank stipulates that the lessee should not assign or sublet the property to third parties, or should not do so without its approval.

6. The customer may jointly acquire an asset that he wished to lease with the bank, and then takes on lease the bank’s share of the asset from the bank. In this case, the lessee is a co-owner of the asset and therefore has to pay rent only on the share that he does not own.

7. The duration of an Ijarah contract must be specified in the contract. The period of the Ijarah should commence on the date of execution of the contract, unless the two parties agree on a specified future commencement date.

8. If the bank signs an Ijarah contract for a particular asset for a specified period of time, it cannot sign another Ijarah contract with another lessee for the duration of the existing Ijarah period or for any remaining period thereof.

9. The leased asset should fulfill the following conditions:• It must be capable of being used while preserving the asset.• The benefit from an Ijarah must be lawful in Shari’a.• The bank must accept responsibility for any defects of the leased asset which impair the intend-

ed use of the asset, and may not exclude its liability for any impairment that the leased asset may sustain which affects the benefits intended to be available under the Ijarah contract.

10. The major maintenance must be borne by the lessor, while the periodical (ordinary) maintenance must be borne by the lessee.

Chapter X

Ijarah with the Promise to Sell and Forward Ijarah

Allah, the Almighty, says,“To any that desires the tilth of the Hereafter, We give increase to his tilth; and to any that desires the tilth of this world, We grant somewhat thereof, but he has no share or lot in the Hereafter.” (Surat Al Shura- Verse 20)

he Messenger of Allah, peace be upon Him, says, “The feet of a servant will not move on the Day of Judgment until he has been questioned about four things): his life - how he spent it, his knowledge - how he acted upon it, his wealth - where he earned it and how he spent it, and his body - how he used it.”(Narrated by Al Turmuthi)

65

Do you know?The total number of Islamic banks and investment and financial companies in the GCC region is 140, out of which 47 are Islamic banks, more than half of which are based in Bahrain, while Kuwait represents 57% of Investment and financial companies in the GCC region.

66

11. The leased asset is the responsibility of the lessor throughout the duration of the Ijarah, un-less the lessee commits misconduct or negligence.

12. The lessor may take out insurance on the asset by way of lawful insurance, as much as pos-sible, and insurance costs shall be borne by the lessor. The lessor may take this into consid-eration when fixing the rental.

13. The bank may not acquire a leased property and lease it once again, since there is no benefit from it. The first lease contract should be terminated before entering into a new Ijarah, or the Ijarah may be added to the future in order to commence after the termination of the old Ijarah contracts.

14. The bank may acquire a land and lease it unto the customer if it is possible to utilize such land.

B) Rules of Ijarah1. The lease rental must be specified.2. The lease rental may be in cash, in kind (goods) or benefit (service).3. The lease rental may be for a fixed or variable amount, according to whatever desig-

nated method the two parties agree upon.4. In case of the rental is subject to changes (floating rental), it is necessary that the

amount of the rental of the first period of the Ijarah contract be specified. It is then per-missible that the rental for subsequent periods be determined according to a certain benchmark. Such benchmark must be based on a clear formula which is not subject to dispute, (such as LIBOR and BIBOR), which is the benchmark for market prices.

5. The two pazrties may agree to amend the rentals of future periods, i.e. the periods for which the lessee has not yet received any benefit. The rentals of any previous periods which have not yet been paid cannot be increased.

6. No increase in the rental due may be stipulated by the lessor in case of delay in payment by the lessee. It may be provided in the contract of Ijarah that a lessee who delays payment for no good reason undertakes to donate a certain amount or percentage of the rental due in case of late payment, and such donation should be paid to charitable causes.

7. If the lessee stops using the leased asset or returns to the owner without the owner’s consent, the rental sill continues to be due in respect of the remaining period of the Ijarah, and the lessor may not lease the property to the another lessee for this period, but must keep it at the disposal of the current lessee.

C) Termination and expiry of the Ijarah contract1. It is permissible to terminate the lease contract by mutual consent.

The Messenger of Allah, peace be upon Him,,says“Allah is pure and accepts nothing but what is pure. Indeed, Allah commands the believers with what He commands the Messen-gers and says: „O Mes-sengers! Eat of the things good and pure and work righteous deeds and says: „O you who believe! Eat of the things good and pure that We have provided for you.‟ Then he mentioned a man who had traveled on a long journey, his hair disheveled and discol-ored with dust. “He will raise his hands to the sky saying „O Lord! O Lord!‟ but his food is unlawful, his drink is unlawful, and his clothing is unlawful. How then can he be an-swered?”(Narrated by Muslim)

Chapter X

Ijarah with the Promise to Sell and Forward Ijarah

67

2. An Ijarah contract does not terminate with the death of either party thereto. However, the heirs of the lessee may terminate the Ijarah contract if they can prove that they cannot afford to pay the rental.

3. An Ijarah contract expires with the total destruction of the leased asset in the case of leasing a specific asset or with the inability to enjoy the usufruct owing to the loss of the benefit that the asset was intended to provide. However, an Ijarah contract does not expire with the total destruction of the leased asset in the case of leasing a described Ijarah (forward Ijarah), and in this case the lessor is obliged to provide an alterative asset fulfilling the same conditions.

4. The two parties may agree to terminate the Ijarah contract before it begins to run.5. The lease expires upon the expiry of its term.

D) Rules governing Ijarah Muntahia Bittamleek1. In Ijarah Muntahia Bittamleek, the method of transferring the title to the leased asset to

the lessee must be evidenced in a document separate from the Ijarah contract document, using one of the following methods:

• By means of a promise to sell for a token or other consideration.• Accelerating the payment of the remaining amount of rental (settlement).• A promise to give it as a gift.• A promise to give it as a gift, contingent upon the payment of the remaining installments.

2. A promise to transfer the ownership is a binding promise by the lessor. However, a bind-ing promise is binding on one party only, while the other party must have the option not to proceed. This is to avoid a bilateral promise by the two parties which is prohibited on Shari’a because it amounts in essence to a contract.

3. Transfer of the ownership of the leased property cannot be made by executing, along with the Ijarah, a sale contract that will become effective on a future date.

E) Rules governing Described (Forward) Ijarah1. Ijarah may be concluded for an a described (forward) Ijarah in an accurate way, where-

by the lessee customer asks the bank to prepare and make ready a specified asset or a certain property and lease it after it becomes available and ready.

2. The bank may make ready the asset or property even if it is not owned by it (where an agreement is concluded to hand over the described (forward) asset during the period of the contract).

3. It is not a requirement of the described (forward) Ijarah that the rental should be paid in advance as long as the lease is not executed according to the contract of Salam (or Salaf).

The Messenger of Allah, peace by upon Him, says,“He who gives respite to someone who is in straightened circumstanc-es, or grants him remis-sion, Allah will shelter him in the shade of His Throne, on the day of Resurrec-tion, when there will be no shade except its shade.”(Narrated by Al termathy)

The Messenger of Allah, peace be upon Him, says,“Who cheats us is not one of us.”(Narrated by Muslim)

68

4. If the lessor delivers something other than what has been described, the lessee may reject it and demand some-thing fulfilling the specifications, or rescind the contract.

5. The described (forward) Ijarah does not terminate with the destruction of the asset, and the lessor should provide another asset conforming to the specifications. This is unlike the ordinary Ijarah contract.

6. The bank may not charge the rental for the asset or property before enabling the lessee to benefit from the leased asset. The bank may collect from the lessee a rental on account or a rental added to the future. It may be agreed that the rental paid on account should be a rental for the first period of the Ijarah contract.

Fifth: Comparison between Murabaha and Ijarah

Situation Murabaha Ijarah

Purpose Expeditious acquisition Gradual expedition

Status in Shari’a Transfer of title Sale of benefit

Bank’s ownership Required Required

Bank’s guarantee Guarantee terminates on sale Guarantee is not transferred except after the expiry of the lease

Insurance of the property By the bank By the bank

Changes to the rental Impermissible after the contract is concluded

May be made for subsequent periods

Specification of the original price of the sold or leased property and the fees

Binding Not binding

Increasing the rent due to delay in payment

Impermissible. However, an amount may be paid for charities

Impermissible. However, an amount may be paid for charities

Stipulation for non-acceptance of responsibility for defects

Permissible Impermissible

Chapter X

Ijarah with the Promise to Sell and Forward Ijarah

69

Do you know?In the year 2007, some 300 conventional banks were offering Islamic banking products.

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First: Definition1. Musharaka: It is a form of an agreement between two or more parties to combine their

assets, labour or liabilities for the purpose of making profit, and it is applied by Islamic banks as a sharika al-aqd (contractual partnership).

2. Diminishing Musharaka: It is a form of partnership in which one of the partners prom-ises to buy the equity share of the other partner gradually until the title to the equity is completely transferred to him.Companies are classified into a contractual partnership and an ownership company. Dis-missing Musharaka take the form of sharika al-aqd (contractual partnership).

Second: Classification of Sharika Al-AqdSharika Al-Aqd is divided into two main categories:The first category is the traditional fiqh-nominate partnerships. They include the fol-lowing types of companies:1. Sharikat Al-Inan (contractual partnership): It is a partnership between two or more parties

whereby each partner contributes a specific amount of money in a manner that gives each one a right to deal in the assets of the partnership, on condition that the profit is distributed according to the partnership agreement and that the losses are borne in ac-cordance with the contribution of each partner to the capital.

2. Sharikat al-wojooh or dhiman (liability partnership) (partnership in creditworthiness or reputation): A partnership in creditworthiness (partnership of liability) is a bilateral agree-ment between two or more parties to conclude a partnership to buy assets on credit on the basis of their reputation for the purpose of making profit, whereby they undertake to fulfill their obligations according to the percentages determined by the parties.

3. Sharikat Al-A’mal (professional or vocational partnerships and partnerships in skilled jobs): A service partnership is an agreement between two or more parties to provide services pertaining to a profession, vocation or skilled trade or to render some services or professional advice or to manufacture goods, and to share profit according to an agreed upon ratio.

The second category is the modern companies, mainly the following:1. Stock company: It is a company of which the capital is partitioned into equal units or trad-

able shares and each shareholder’s (co-owner’s) liability is limited to his share in the capital.

Al Saib Ibn Abi Al Saib was the trade partner of the Messenger of Allah, peace be upon Him, before the advent of Islam, and that on the Day of Victory, when Mecca was captured, The Messenger of Al-lah said to Abu Al Saib: ‘Welcome my brother and partner who never privileged or wrangled’(Narrated by Abu Dawood

and Ibn Majah)

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2. Joint-Liability company: A joint liability company is a form of personal partnership the capital of which is divided into equal shares that can be traded, and all the partners in it are personally responsible for the obligations and liabilities of the company if the existing assets cannot meet the liabilities of the company.

3. Partnership in commendum: Partnership in commendum is a form of financing partner-ship Under this type of companies, the ownership is calculated based on disproportionate lots and not on the basis of proportionate shares that are equal in number. Profit must be distributed according toe ratio of the lots or agreement. Losses are borne by the manag-ing partners, irrespective of the ratio of their shares in the capital. Sleeping partners, on the other hand, are liable for losses only to the extent of the percentages of their lots in the capital.

4. Company limited by shares: The company limited by shares is a form of personal partner-ship. The subscription in this company is in accordance with equal numbers of shares and it comprises of managing partners and sleeping partners. Losses are borne by the partners to the extent of their assets.

5. Allotment/particular (Muhassa) partnership: It has the same definition as that of Sharikat Al-Inan

6. Diminishing Musharaka: This type of company originates from Sharikat Al-Inan).

Third: Practical steps of Diminishing MusharakaThe main objective of the Diminishing Musharaka should be known as:1. Ownership by the customer of a certain property, where Musharaka involves the same

property intended to be owned (by three parties).2. Utilization of the partner’s amount for personal expenses, such as payment of debts or

purchase of building materials (participation by two parties).Firth Case: A customer wishes to own a certain property, but he does not have its value, and so he enters into partnership with the bank to buy it, and the property in this case is owned by a third party. This Musharaka is implemented in the following method (See illustrative diagram No. (14)).

1. The bank purchases the property from its original owner by way of a purchase agreement, and pays the price of the property to the owner and registers the property in its name.

2. A Diminishing Musharaka contract is concluded between the bank and the customer wishing to own the property, and the customer undertakes to pay part of the amount as a share in the property.

The Messenger of Allah, peace be upon Him, says, “Al Kharaju Bidhaman (En-titlement to profit, guaran-tee for risk of loss” (Narrated by Al Nisa’i)

Famous quotesWhat we need is a humane market economy, and then the current economic crisis will turn into a market econ-omy that takes social di-mension into account. What we can rely upon now is the decisive and thoughtful conduct at the same time, from those who caused the global economic crisis, to bear its consequences and to make contributions to reaching a solution to it. “ (German Chancellor Angela

Merkel).

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3. A promise is concluded to buy the equity, whereby the customer promises the bank to buy the entire equity.

4. The bank signs a sale agreement for the equity, whereby the customer buys the bank’s shares gradu-ally, until he acquires all the bank’s shareholding. Al-ternatively, a lease agreement is signed for the shares, whereby the bank leases its share unto the customer, and then the bank sells its share to the customer for a token price or for the market price at the end of the pe-riod, and then the bank transfers the title to the prop-erty to the customer at the end of the period.

Second Case: A customer wishes to obtain cash for one of the following purposes:• Payment of a debt;• Payment of certain expenses;• Construction of a building;• Purchase of another property; or• Purchase of a leased property, etc.In this case, the customer should acquire a property the value of which is equal to, or more than, the required amount. The operation is carried out as follows (See illustra-tive diagram No. (15))

1. The bank signs a Diminishing Musharaka agreement with the customer, in which the bank is admitted as partner in the customer’s property depending on the required amount.

2. The customer promises the bank to acquire its share.3. The bank leases its shares unto the customer.4. The bank sells its shares to the customer at the end

of the period.

Allah, the Almighty, says, “Say:If it be that your fathers, your sons, your brothers, your mates, or your kindred: the wealth that you have gained; the commerce in which you fear a decline: or the dwellings in which you delight- are dearer to you than Allah or His Messenger, or the serving in His cause;- then wait until Allah brings about His decisions: and Allah guides not the rebellious.”(Surat Al Taubah - Verse: 24).

No. (14)- Practical steps of Dimihnsing Musharaka between three parties)

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Diminishing Musharaka

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Fourth: Shari’a rulings relating to Diminish-ing Musharaka1. Musharaka is a transaction that starts with the sign-

ing of the Musharaka contract, after which buying and selling of the equity take place between the two part-ners whereupon one of the partners owns the asset or property subject of the Musharaka. It is, therefore, necessary that this buying and selling should not be stipulated in the partnership contract. In other words, the buying partner is allowed to give only a promise to buy. This promise should be independent of the part-nership contract. In addition the buying and selling agreement must be independent of the partnership contract.

2. It is not permitted that the contract of diminishing partnership include any clause that gives any of the parties a right to withdraw his share in the company’s capital.

3. It is not permitted to stipulate that one partner should bear all the cost of insurance or maintenance on the ground that he will eventually own the subject matter of the partnership.

4. Each partner should contribute part of the capital. The contribution may be in the form of cash or tangible as-sets that can be translated into a monetary value, for example, a land for building or equipment required for the operation of partnership.

5. The ratio of profit or income of the partnership that each partner (the bank and customer) is entitled to should be clearly determined.

6. It is not permitted to stipulate that one partner has a right to receive a lump sum out of the profits.

Do you know?Socialism is an economic system which is based on communal ownership. It means the system in which the means of production, land and factories are owned by the State. It also means the State’s interference in the life of workers and poor classes to enact social and economic legislation alleviating their suffering and granting them some benefits.

No. (15)- Practical steps of Musharaka between two parties)

74

he Messenger of Allah, peace be upon Him, says“A person who prays is like a trader, his prof-it is not pure until his capital is pure. In the same way, the volun-tary prayers of a per-son who prays are not accepted until he per-forms the prescribed prayers. (Narrated by Al Bayhaqi and

Abu Ya’la)

7. It is permissible for one of the partners to give a binding promise that entitles the other partner to acquire, on the basis of a sale contract, his equity share gradually, according to the market value or a price agreed at the time of acquisition. However, it is not permitted to stipulate that the equity share be acquired at its original or face value, as this would constitute a guarantee of the value of the equity shares of one partner (the bank) by the other partner, which is pro-hibited by Shari’a.

8. The partners may arrange for the acquisition of the equity share of the bank in a manner that serves the interests of both parties. This includes, for example a promise by the bank’s cus-tomer to set aside a portion of the profit or the return he may earn from the partnership for the acquisition of a percentage of the equity of the institution. The subject matter of the partner-ship may be divided into shares, in which case the bank’s partner can purchase a particular number of these shares at certain intervals.

9. It is permissible for either of the partners to rent or to lease the share of the other partner for a specified amount and for whatever duration, in which case each partner will remain respon-sible for the periodical maintenance of the share on a timely basis.

10. One of the general rules in Musharaka is that profit is shared as agreed between the two parties, and that loss is borne by the partners in proportion to their shares in the Musharaka.

11. The bank may vary the sale prices of the of subsequent shares only, by signing an agreement with its customer to use a certain benchmark therefor.

12. Musharaka may involve a property, land or a certain project.13. The partners are entrusted with the assets of the Musharaka assets, and therefore there may

not be any guarantee provided by the partner except in cases of trespass or negligence. It may not be stipulated that a partner should guarantee the capital of another partner.

14. An undertaking may be provided by a third party, who is independent in his personality and financial liabilities from the parties to the Musharaka, to bear the loss, as follows:• The undertaking should be an obligation separate from the Musharaka contract, and for no

consideration.• The third party (providing the guarantee) should not be a party owning or owned in excess

of half of the party given the guarantee.• Either party may withdraw from the partnership by buying the remaining shares or when the

bank sells the remaining equity.15. A partnership termin ates on the expiry of its duration or at any time before if the partners so

agree.

Allah, the Almighty, says,“ …truly many are the partners (in business) who wrong each other: not so do those who be-lieve and work deeds of righteousness, and how few are they?” (Surat Sad: Verse 24).

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Diminishing Musharaka

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The Messenger of Allah, peace be upon Him, says,“The Muslims are bound by their conditions, except for conditions which forbid something that is permitted or permit something that is forbidden”.(Narrated by Ahmed and Ibn Majah)

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Allah, the Almighty, says,“….He knows that there may be some among you in ill-health; oth-ers traveling through the land, seeking of Allah’s bounty.”(Surat Al Muzzammil – Verse: 20)

First: DefinitionMudaraba: is a partnership in profit whereby one party provides capital (Rab Al-Maal) and the other party provides labour (Mudarib).

The most common form in which Mudaraba is prac-ticed by Islamic banks is in savings and deposit accounts, whereby the customer depositor is Rab Al-Maal, while the bank is the Mudarib.

Second: Steps1. The customer applies to the bank to open a sav-

ings account or deposit account by depositing a certain amount for a specified period of time.

2. The bank invests the amount provided by the customer in investment projects or transactions.

3. Both parties agree to distribute profit according to agreed upon percentages, such as 50% per-cent each, or 60% and 40%, etc.

4. At the end of the deposit period or the account, or when periodical liquidation (revaluation) is made (weekly, monthly or annual) profit is distrib-uted as agreed.

(See illustrative diagram No. (16))

Third: Shari’a rulings relating to MudarabaA) General Rulings1. The Mudaraba contract is not binding, i.e. each

of the contracting parties may terminate it unilat-erally except when the Mudarib ha has already commenced the business. But when the con-tracting parties agree to determinate a duration for which the contract will remain in operation. In

Chapter 12

Mudaraba

No. (16)- Steps of Mudaraba

77

this case, the contract cannot be terminated prior to the end of the designated duration, except by mutual agreement of the two contracting parties.

2. The Mudarib (bank) is investing Mudaraba capital on a trust basis in which case the Mudarib is not liable for the capital or the profit, except in case of breach of the require-ments of trust, such as misconduct in respect of the Mudaraba fund, negligence and breach of the terms of the Mudaraba contract.

3. Mudaraba is divided into:• Unrestricted Mudaraba: It is a contract in which the capital provider permits the Mudar-

ib to administer a Mudaraba fund without any restrictions. In this case, the bank em-ploys its expertise in this field.

• Restricted Mudaraba: It is the Mudaraba in which the capital provider restricts the ac-tions of the Mudarib to a particular location or to a particular type of investment as the capital provider considers appropriate.

4. The capital of Mudaraba should be clearly known to the contracting parties and defined in terms of quality and quantity.

5. Prizes may be offered under Mudaraba accounts, subject to the following conditions:• The prizes should be a donation by the shareholders without charging the depositor

customers any amounts.• The depositor’ investment fund should be separated from the shareholders’ investment

fund.• In case the depositor customers are obliged to deposit a specified amount in the ac-

count, the bank should invest such amount as Mudarib in their favour and pay the profit due to them.

B) Profit1. It is a requirement that the mechanism for distributing profit must be clearly known in

a manner that eliminates uncertainty and any possibility of dispute. The distribution of profit must be on the basis of an agreed percentage of the profit. Example: 50% and 50% for both parties, or 60% and 40%. If a profit is made at the end of the Mudaraba, it must be divided according to the percentages agreed upon. No agreement may be reached on the basis of a lump sum or a percentage of the capital. Example: the bank says to the customer “We hereby guarantee you a profit of BD 1,000.” Similarly, profit may not be on the basis of a percentage of the capital, like when the bank says to the customer: “We hereby guarantee you a profit of 5% of your capital.” However, initially, a

Hadith:“Al Abbas, may Allah be pleased with him, used to stipulate certain condi-tions when he paid money in the form of Mudaraba. The conditions included that the Mudarib should not venture out onto the sea with it, or in a valley, or buy a creature with it, and if he did so, he would guar-antee the money. These conditions were conveyed to the Messenger of Allah, peace be upon Him, who approved them.”(Narrated by Al Bayhaqi and Al

Darqutni).

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certain percentage or lump sum may be specified as a way of projection, like when the bank says to its customer: “In view of the studies conducted by us, and in view of the profits made during previous years, we expect your profit to be BD 1,000 or 5%.” If no profit is made, the bank may not pay the said amount or percentage.

2. No profit can be distributed among depositors and the bank except after the follow-ing:

3. The capital of the Mudaraba is maintained intact. Whenever a Mudaraba operation incurs losses, such losses stand to be compensated by the profits of future opera-tions of the Mudaraba, unless the customer’s Mudaraba is in a transaction of his own.• Deduction of all expenses.• Deduction of all reserves and provisions agreed upon or which are prescribed by

the State.• The capital provider (depositor customer) bears the losses incurred in the Muda-

raba unless it can be proved that the Mudarib (bank) has committed a negligence or trespass or unless it has violated the Mudaraba terms and conditions.

4. Funds may be established to protect the depositor customer’s money and the bank’s money, by deducting part of the profits resulting from the Mudaraba to such funds.

5. The principle is that the funds of the bank and the depositors should be invested through three accounts (funds):• An account for the bank (shareholders), and the profit of this account go to the bank

only.• An account for the depositors. The profits of this account go to the depositors and

the bank in its capacity as Mudarib.• Mixed account: If the Mudratab commingles its own funds with the customer’s

funds, the bank is entitled to profit in its capacity as Mudarib and as investor.6. A Mudaraba contract can be liquidated in the following manner:• By unilateral termination of the contract by one of the parties.• With the agreement of both parties.• On the date of maturity of the Mudaraba.• If the funds of the Mudaraba contract have been exhausted or have suffered loses.• On the death of the Mudarib or the liquidation of the institution that acts as Mudarib.

Do You Know?The first experiment of Islamic banks was started in one of the rural areas of Pakistan in the late 1950s, when an institution was estab-lished to receive the de-posits of wealthy land-owners and provide them to poor farmers. Depositors were not paid any return on their deposits, and the loans extended to farmers were interest-free also. The institution’s role was restricted to charg-ing token fees covering its administrative costs only. However, because of the lack of qualified personnel, the institu-tion closed down in the early 1960’s.

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Mudaraba

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Fourth: Comparison between Mudaraba accounts in Islamic banks and loan accounts in usury-based banks

Scope Islamic Banks Conventional Banks

Status in Shari’a Shari’a-based Mudaraba Loan

FeesFees are charged sometimes for opening and closing the account and for ordering

a statement of account, etc.

Fees are charged sometimes for opening and closing the account and for ordering

a statement of account, etc.

InvestmentFunds are invested in Islamic activities

and projects, such as Mudaraba, Ijarah, Musharaka, etc.

Funds are invested in usurious activities. The majority of the funds is invested in

interest-based loans.

Profit mechanismProfit is generated in a Shari’a-compliant way, through labour, guartnee, etc. in ac-

cordance with Shari’a-based methods

Profit is achieved from the difference between the credit and debit interest in

the bank’s transactions

LossRab Al-Maal (depositors) bear the loss. But it is borne by the Mudarib (bank) in cases of negligence and misconduct or

when it violates terms and conditions

It is borne by the bank

Guarantee of the capital and profit Not guaranteed, because they are based on profit and loss in investment

The bank guarantees both the capital and profit

Commingling of fundsDepositors’ investment and profits are

separated from the shareholders’ invest-ments and profit. If funds are commin-

gled, this must be in a separate account

No separation is made between the de-positors’ and shareholders’ accounts

Prizes

They are a donation by the shareholders to depositors, and depositors do not pay

any amount of the prizes

The funds of depositors are invested, and they are paid profits according to

Mudaraba.

They are deducted from the commingled shareholders’ and depositors’ profits, and so the mechanism is like prohibited gam-bling where the depositor pays a share in

the prizes.Depositors are not paid their profit and

the bank takes them all. If the bank gives any prizes to the depositors, this is based

on interest-based loan

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FiguresThe average growth rate of deposits in Islamic banks totaled 4.26%, standing around $ 8.39 billion by the end of the year 2003. Current accounts repre-sent the lion’s share of these deposits, totaling around 17 billion by the end of the same year.

81

82

First: Definition1. Istisna’: It is an order to manufacture some-

thing. It is a sale between the mustasni’ (ultimate purchaser or buyer ordering the manufacture and the sani’ (manufacturer). The bank manufacturers a described com-modity, on the request of the customer, and delivers it within the appointed time provid-ed that the cost of the labour is paid by the manufacturer (bank) against the price they agree upon and paid promptly or later.

2. Parallel Istisna’: It is a contract whereby the bank concludes a parallel Istisna’ contract between it and the manufacturer (contrac-tor, trader, etc) in order to manufacture a de-scribed commodity to carry out the first Is-tisna’ contract concluded between the bank and the customer. It is stipulated that the two contracts should remain separate form other in the clauses.

Second: Steps of Istisna’ and Parallel Istisna’To know the steps of Istisna’ and Parallel Is-tisna’, we give the following example:1. The customer applies to the bank to con-

struct a building worth BD 200,000 (Bahrain Dinars two hundred thousand). The bank signs an Istisna’ contract with the customer to construct the building against the price of BD 250,000 (Bahrain Dinars two hundred and fifty). The difference represents the bank’s profit in the transaction.

Hadith: The Messenger of Allah, peace be upon him, manufactured a ring and a pulpit. (Narrated by Al Bukhari)

Illustrative diagram No. (17): Practical steps of Istisna’ and Parallel Istisna’

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2. The bank signs a Parallel Istisna’ contract with the manufacturer (builder) for the amount of BD 200,000 (Bahrain Dinars two hundred thousand).

3. After the building is completed, the contractor hands it over to the bank.4. The bank hands over the building to the customer, and the bank is paid the installments

of the transaction as agreed (see illustrative diagram No. (17))

Third: Shari’a rulings A) General Rulings1. It is not stipulated that the bank should own the Istisna’ materials before signing the Is-

tisna’ contract with the customer.2. The Istisna’ contract is binding upon the two parties, and it may not be terminated except

with their mutual agreement.3. The manufactured thing should fulfill the following conditions:• Its type, kind, quantity and specifications required should be determined.• The price of the subject matter of Istisna’ should be known. • Time of delivery of the subject matter of Istisna’ should be specified.

4. If the subject matter of the Istisna’ contract is contrary to the specifications, the customer ordering the manufacture is not obliged to take it over without its consent.

5. It is not permitted four the manufacturer to stipulate in the contract of Istisna’ that he is not liable for defects.

6. It is not permissible for the customer ordering the manufacture to be the manufacturing contractor.

7. The bank may not increase the price for the customer when he delays payment, but it may oblige him to pay a penalty to charitable causes.

8. The bank may oblige itself to pay a compensation amount when it delays the delivery of the commodity to the customer. It is also permissible for it to stipulate that compensa-tion should be paid by the manufacturing contractor when he is late in delivery of the commodity. Such compensation is for the delay in handing over the manufactured com-modity and not for the payment of cash.

B) Rulings relating to Al-Masnoo’ 1. An Istisna’ contract is permitted only for raw materials that can be transformed from their

natural stage by a manufacturing or construction process involving labour, such as con-struction of building or design of a kitchen or furniture which is not manufactured, etc.

Famous quotesThe modern banking system manufactures money out of nothing. The process is perhaps the most astounding piece of sleight of hand that was ever in-vented. Banking was conceived in iniquity and born in sin. Bank-ers own the earth. Take it away from them, but leave the power to create money, and with the flick of a pen they will create enough money to buy it back again. Take this power away from them and all great fortunes like mine would disappear, and they ought to disappear, for then this would be a better and a happier world to live in. But if you want to continue to be the slaves of the banks and pay the cost of your own slavery, then let the bankers continue to cre-ate money and control credit» Sir Josiah Stamp, Director, Bank of

England 1928-1941 and second richest

person in England.

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2. The bank may itself manufacture the thing required, provided that it should manufacture it according to specifications. In this case, no Parallel Istisna’ contract is concluded.

3. The manufacturer is under an obligation to produce the subject-mater of Istinsa’a ac-cording to specifications and within the period agreed upon.

4. A contract of Istisna’ cannot be drawn up on the basis of a Murabaha sale, for example, by determining the price of Istinsa’a on a cost-plus basis.

5. The bank may demand accordingly ‘arbun as a guarantee for Istisna’a.6. It may be agreed to alter the details of the manufactured commodity. If such alteration

entails extra costs, they may be charged to the customer.C) Parallel Istisna’a1. As a result of concluding an Istisna’a contract in the capacity of a producer or supplier,

the bank must assume liability for ownership risk and maintenance and insurance ex-penses prior to delivering the subject-matter to the ultimate purchaser (the customer).

2. It is not permitted to make any contractual link between the obligations under two con-tracts (the contract of Istisna’a and the contract of Parallel Istisna’a).

3. The bank is considered manufacturer in the first Istisna’a contract and an ultimate pur-chaser in the Parallel Istisna’a (ordering the manufacture).

The Messenger of Allah, peace be upon Him, says,“Riba has seventy seg-ments, the least seri-ous being equivalent to a man committing adultery with his own mother. And worst form of Riba is harming the honor of a Muslim man.»(Narrated by Al Hakem and

Ibn Majah).

Famous quotesUsury, once in control, will wreck any nation(William Lion Mackenzie

King- Former Canadian Prime

Minister)

Chapter XIII

Istisna’a and Parallel Istisna’a

85

Famous quotesThe first state to launch war for the sake of the rights of the poor and to wrench these rights from the pangs of the rich is the Islamic State led by Khalifa Rashid Abdu Bakr Al Siddique, who said: “ I swear by Allah that if they prevented me from a rope which they used to pay to the Messenger of Allah I will fight them for it.” For this sake, Islam takes care of economics and has built it on just foundations. It is not based on property alone, but money is created through labour and effort. (Dr. Yousuf Al Qaradawi, President of the World Federation of Muslim Scholars).

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First: Definition1. Salam: It is the sale of something described, and

it is one of the types of sales in which the price, known as the Salam capital, is paid at the time of contracting while the delivery of the item to be sold, is deferred.

2. Parallel Salam: It is a contract whereby the Muslam ilaili (bank) enters into another separate Salam contract with a third party (seller or sup-plier) so that the bank can fulfill its obligations under the contract.

Second: Steps of Salam and Parallel Salam1. The customer or buyer (al-Muslam ilaihi) applies

to the bank to assist him in obtaining 100 tons of bananas from India after 5 months against the amount of BD 50,000 (Bahrain Dinars fifty thousand), for example. The bank signs a Salam contract with the customer for the amount of BD 70,000 (Bahrain Dinars seventy thousand). The difference represents the bank’s profit, and the bank is paid the amount promptly.

2. The bank signs a Parallel Salam contract with the banana supplier in India, whereby the bank buys the bananas against a prompt price of BD 50,000 (Bahrain Dinars fifty thousand), provided that it should be grown in India and delivered after 5 months. The bank pays the amount to the sup-plier promptly.

3. After the crop is harvested, it is sent by the sup-plier to the bank.

4. The bank delivers the crop to the customer.(See illustrative diagram No. (18))

Ibn Abbas, peace be upon him, said:“Allah’s Apostle came to Medina and the people used to pay in advance the price of fruits to be delivered within one or two years. The Messenger of Allah said, ‘Whoever pays money in advance for dates (to be delivered later) should pay it for known specified weight and measure of the dates.(Narrated by Al Bukhari and Muslim)

No. (18)- Practical steps of Salam and Parallel Salam

Chapter XIV

Salam and Parallel Salam

87

Do you know?

The Sumerians engaged in banking activities in their temples, the most well known of which is the “Red Temple.” The Babylonians also engaged in banking activities, as evident from the engravings on their antiquities. The Greeks, on the other hand, were the first to mint gold and silver money, and they also engaged in banking activities.

Third: Rulings relating to Salam A) Conditions of the Salam contract1. It should be known in quantity, measure, type, kind and specifications, and whether it is in

the form of currencies or fungible goods (such as wheat and other cereals).2. For the Salam contract to be valid, the capital must be paid immediately at the place where

the contract is concluded. However, as an exception to this ruling, payment may be de-layed for one or two days.

3. It is not permitted that a debt be recognized as the capital of Salam.

B) Conditions of the Salam goods1. Salam goods should be of a kind that can be described, such as those which may be

weighed, measured or counted. Salam is also permissible in properties and buildings, and such other things, because they can be identified and specified by way of descrip-tion.

2. It is a requirement that the Salam goods be known to the contracting parties in a manner that eliminates any possibility of uncertainty or ambiguity. In other words, they should be identifiable on delivery by way of viewing and description. These conditions must be fulfilled, namely:

• Determination of kind, such as wheat, barley, dates, etc.• Determination of type, such as Syrian, Egyptian, etc.• Determination of quality (good, substandard, solid, soft, etc).• It must not be anything specific like “this car” or a readily available house.• The Salam goods must be deferred.• The date of delivery for the Salam goods should be known. For example, the bank says

to the customer: “I will deliver the goods to you on 1 January 2010 or on Eid Al Fitr or on Eid Al Adha, etc.

3. Salam is not permitted for the Salam goods to be an amount of gold or silver if the capital of the Salam contract was paid in the form of gold or silver.

C) Rulings relating to Salam1. It is not permissible for the customer to sell the goods before collecting them from the bank.

Similarly, it is not permissible for the bank to sell the goods before they are collected from the supplier.

2. The customer may replace the goods with another item (other than currency) after the maturity date.

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D) Delivery of al-muslam fihi (goods)1. The bank is under the obligation to deliver the goods agreed upon to the buyer on the due date in accordance with

the terms of the contract.2. The customer has the option of rejecting or accepting the goods if the bank delivers goods different from the speci-

fications agreed upon.3. It is not permitted to stipulate a penalty clause in respect of delay in the delivery of the goods.

E) Parallel Salam1. It is not permissible to link the Parallel Salam contract between the bank and the supplier to the first Salam contract

between the bank and the customer or tie them together.2. The bank in the first Salam contract between it and the customer is a seller, while in the Parallel Salam contract be-

tween the bank and the supplier it is a buyer.

Fourth: Comparison between Istisna’a and Salam

Scope Istisna’a Salam

Purpose

It is used in things which can be manufactured, like buildings,

properties, automobiles and aircraft, kitchens and unmanufactured

furniture.

It is used in crops and certain commercial goods, and it is not a requirement for it to involve work

Prompt payment of the price Not required Required

Compensation for delay in delivery of the asset Permissible Impermissible

Chapter XIV

Salam and Parallel Salam

89

Famous quotesThe strange thing is not the collapse of the capitalist system, because this has been long predicted by Western economists and Muslims at the same time. But the strange thing is its collapse so dramatically and unexpectedly, because it was born with the seeds of its own destruction. (Dr. Mohammed Al Qattan- Director of the Islamic Economics Unit of

the College of Management Sciences).

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Islamic Sukuk market grows by 45% a year. It has grown enormously, with the total of its issues standing at $ 300 billion and the size of its assets $ 65 billion. Malaysia alone accounts for 60% of the size of Sukuk worldwide.

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Jabir Bin Abdullah, may Allah be pleased with him, said:“The Messenger of Allah refused to pray over the one who died while still in debt. A man died among us and we bathed him, perfumed him and shrouded him. Then we came to the Mes-senger of Allah and asked him, ‘Will you pray on him?’ He took a few steps and then said, ‘Has he any debts?’ We replied, ‘He has a debt of two Dinars.’ Upon hearing that, the Messenger of Allah went away. Then Abu Qatadah undertook to pay the debt. We, thereafter went to the Messenger of Allah and Abu Qa-tadah told him, ‘I would pay the two Dinars.’ The Messenger of Allah then said, ‘The creditors’ right is guaranteed and the de-ceased is free from debt?’ He said, ‘Yes.’ The Messenger of Al-lah then prayed on him.”(Narrated by Abu Dawud).

First: DefinitionSukuk: They are certificates of capital value representing undivided shares in owner-ship of tangible assets, usufruct and services or (in the ownership of) the assets of par-ticular projects or special investment activity. However, this is true after the payment of the value of the Sukuk and the receipt thereof and after the closing of subscription and the employment of funds received for the purpose for which the Sukuk were issued.

Second: Characteristics of Sukuk1. They are certificates of equal value issued in the name of the owner or bearer in

order to establish the claim of the certificate owner over the financial rights and obli-gations represented by the certificates.

2. They represent a common share n the ownership of the assets made available for investment.

3. Sukuk are issued on the basis of a Shari’a-nominated contract.4. The owners of these certificates share the return as stated in the subscription pro-

spectus and bear the losses in proportion to the certificates owned (held) by them.

Third: Types of Sukuk1. Certificates of ownership of leased assets: These are certificates of equal value is-

sued either by the owner of the leased asset, or they are issued by a financial inter-mediary acting on behalf of the owner with the aim of selling the asset and recov-ering its value through subscription so that the holders of the certificates become owners of the assets.

2. Certificates of ownership of usufructs: They are of many types:• Certificates of ownership of usufructs of existing assets: They are issued by the

owner of an existing asset with the aim of leading the asset and receiving the rental from the revenue of subscription so that the usufruct of the assets passes into the ownership of the holders of the certificates.

• Certificates of ownership of usufructs of described assets: They are certificates issued for the purpose of leasing out tangible future assets and for collecting the rental from the subscription revenue so that the usufruct of the described future as-sets passes into the ownership of the holders of the certificates.

Chapter XIV

Sukuk

93

• Certificates of ownership of services of a specified party: These are certificates issued for the purpose of providing services through a specified provider (such as educational benefits in a nominated university) and obtaining the service charges in the form of subscription income so that the holders of the certificates become owners of these services.

• Musharaka (Participation) Sukuk: These are certificates issued for the purpose of pro-viding future services through described provider (such as educational benefits from a university without naming the educational institution).

3. Salam Sukuk: They are certificates issued for the purpose of mobilizing Salam capital for the production of goods so that the goods come to be owned by the certificate holders.

4. Istisna’a Sukuk: They are certificates issued for the purpose of mobilizing funds to be employed for the production of goods, so that the goods produced come to be owned by the certificate holders.

5. Murabaha Sukuk: They are certificates issued for the purpose of financing the purchase of goods through Murabaha so that the certificate holders become the owners of the Murabaha commodity.

6. Musharaka Sukuk: They are certificates issued with the aim of using the mobilized funds for establishing a new project, developing an existing project of financing business ac-tivity so that the certificate holders become the owners of the project of the assets of the activity. Musharaka certificate are managed on the basis of:• Participation or ownership.• Mudaraba: one Mudarib from the partners or others is appointed to manage them.• Investment agency: An agent is appointed for the certificate holders to manage them.

Fourth: Shari’a rulings relating to Sukuk1. It is not permissible to securitize debts owed as a liability for the purpose of trading.2. The two parties of the contract of issue are:

• The issuer of Sukuk; and• The subscribers (Sukuk holders).

3. The relationship between the two parties to the issue contract is determined on the basis of the type of contract and its status in Shari’a, Murabaha, Ijarah or Salam, etc.

4. The issuance of the Sukuk prospectus represents the issuer’s invitation to subscrip-

Do You Know?Many Islamic Sukuk have been issued by Western financial in-stitutions, like bonds issued by the govern-ment in Germany in the year 2004, targeting Middle Eastern coun-tries in particular, in addition to the first is-sue of U.S. Sukuk in the year 2006 to finance gas field projects.

The Messenger of Allah, peace be upon Him, says,“He who monopolizes (something) is sinful.”(Narrated by Muslim).

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tion, in which case the act of subscription represents and offer. As for acceptance, it is the issuer’s acceptance of the subscription.

5. It is permissible to trade in and redeem investment Sukuk except for described commodities, such as Salam.6. The issuer of Sukuk or certificate holders may specify a Shari’a-compliant method of hedging against risks or miti-

gating the fluctuations of appropriated returns, such as establishing an Islamic insurance fund with contributions from the certificate holders, or participation in an Islamic takaful insurance fund with installments paid by certificate holders.

Fifth: Comparison between Sukuk and usury-based bonds

Scope Sukuk Bonds

OwnershipThey represent common shares in assets yielding income and do not

represent debts owed by the issuer.

Loans extended by their holders to the issuer of bonds.

Profit and loss

Sukuk holders have a percentage in the profit of the project in which they contributed, but they are not entitled

to this profit unless it is actually earned, because it is susceptible

and loss.

The bond holder has a fixed and guaranteed interest rate by the issuer of the bond, and this rate does not rise or fall, nor is it

susceptible to loss

Bearing the obligations of ownership

Holders bear the expenses and assets

Bond holders do not bear any expenses.

Manager’s guaranteeManager does not bear the loss except in the case of trespass,

negligence or violation of conditions

The manager bears the loss and it guarantees such loss.

Contract Shari’a-compliant contract based on an Islamic product.

A loan contract earning usurious interest.

Chapter XIV

Sukuk

95

Salam

Istisna’a

Murabaha

Musharaka

Certificates of usufructs of existing assets

Certificates of ownership of described assets

Partnership Mudaraba Agency Contract

Certificates of ownership of existing assets

Certificates of owner- ship of described

services

Certificates of owner- ship of services of a

specified party

Certificates of owner- ship of usufructs of

existing assets

Certificates of owner- ship of described

assets

Certificates of ownership of usufructs

Types of Investment Sukuk

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Islamic mutual investment funds began operation in the 1990’s and became available to investors wishing to conduct business in instruments complying with the Islamic system. These funds totaled 126, four of which were in European countries, with assets totaling not less than $ 4 billion.

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First: Definition1. Investment funds: They are investment vehicles in which investors’ funds are pooled

for the purpose of placing them in investments specified in the subscription prospec-tus of the fund or in its articles of association. Investors are invited to subscribe in the fund, and the fund is usually managed by an entity enjoying the necessary expertise, which is in most cases the entity which established the fund, against a specific fee.

2. Hedge funds: They are investment vehicles comprising a number of investors the purpose of which is to guarantee the achievement of profits regardless of what hap-pens on the global markets. Such funds aim at hedging against risks of any losses.

Second: Rulings relating to investment funds1. An investment fund has an independent juristic personality and a separate entity from

the entity that manages it, which is known as the Special Purpose Vehicle (SPV).2. The fund issues to each investor a certificate or Saak called “investment unit” which is

very close to the share in the shareholding or joint stock companies. The investment unit represents a common share in the assets of the fund and the owners of such units are entitled to profit made by the fund after deducting the expenses (if any).

3. The unit holders are entitled to all the profit made by the fund until the certificates are redeemed and they recover their rights in the fund entirely. In the subscription pro-spectus, details are provided regulating admission, exit and profits, and such other legal and Shari’a rules governing funds which are required in such prospectuses.

4. Funds usually employ their assets in real estate investments (trading, development or management or in shares or in private equities). The assets of funds are usually invested in transactions or in a specific transaction, whether in the form of Murabaha, Ijarah or Salam. The fund manager who finds a Murabaha opportunity offers an in-vestment fund to raise the funds necessary to the transaction through the fund. After subscription is over, the manager carries out the Murabaha transaction and so an

The Messenger of Allah, says,“How excellent is good money for a good person.” (Narrated by Al Bukhari)

Do you know?Do you know?The philosophy of invest-ment funds is based on guaranteeing profits for in-vestors in them, regardless of the fluctuations taking [lace on global markets. The amount of investment in these funds are huge, because they range usual-ly between $ 500,000 and $ 1,000,000 as minimum. The number of investors in these funds may total 500 investors.

Chapter XVI

Investment Funds

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investment fund may be set up for the sake of a Murabaha or Ijarah transaction or transactions, etc.

5. It is permissible to mortgage investment units or certificates in the funds accord-ing to the assets of the funds.

Third: Steps of establishing investment funds issuing certificates by the banks

1. The bank establishes a portfolio or a special purpose vehicle (SPV).2. As the bank issues the certificates, it sells them to the SPV fully so that they be-

come no longer owned by the bank.3. The SPV appoints a manager who is independent from the bank (third party) and

pays the expenses and the manager’s remuneration, etc. from the SPV’s funds.4. The SPV sells units representing the ownership of each participant in the fund,

and each unit represents a common ownership in all the fund’s assets. Each unit holder owns a common share in the fund representing all the certificates owned by it. The unit holders in the SPV are entitled to all return made by the certificates owned by the SPV after deducting the expenses, if any.

5. The bank gives a promise to the SPV to buy any certificate if the company wishes to sell it, and it may be stipulated in this promise that the purchase price should be the market price or the nominal price, because the bank in this case is not a Mudarib or agent, but a third party, since it has become a foreigner after selling the certificates.

6. The unit holders are entitled to all the profit made by the fund until the certificates are redeemed and they recover their rights in the fund entirely. In the subscrip-tion prospectus, details are provided regulating admission, exit and profits, and such other legal and Shari’a rules governing funds which are required in such prospectuses.

Allah, the Almighty, says, Allah, the Almighty, says, “O you who be-lieve! Eat not up your property among your-selves in vanities: but let there be amongst you traffic and trade by mutual good will.” (Surat Al Nisa- Verse 29).

Do You Know?These funds the idea behind which emerged on Wall Street in the 1940’s totaled 8,000, spread all over the world markets.

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7. Unit holders (investors) may exit the funds by selling their units to the fund at the mar-ket price only (NAV). Therefore, the dates on which they are allowed to sell their units must be mentioned in the subscription prospectus (for example at the beginning of each Gregorian month). At the same time, the fund manager must provide the market price (NAV) or the market minus 2% , for example, in each period they are allowed to exit the fund.

(See illustrative diagram No. (19))

Do you know?The size of investments by governments and individu-al investors in investment funds during the year 2007 totalled $ 65 billion, and they are expected to reach $ 140 billion in the year 2010. These funds are planning to issue Islamic editions of them, worth $ 5 million in the near future.

Chapter XVI

Investment Funds

No. (19)- Steps of Investment Funds

101

Famous quotesIslamic finance can expand the scope of its at-traction beyond its traditional base following the global financial crisis. I have been wonder-ing how can we learn something from what I believed to be an imminent financial crisis and avoid creating the same circumstances once again. But when I looked at the principles of Is-lamic finance, I found all the answers in them. (Toby Bertsch, manager of Bertsch Assets for Asset Management).

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First: Definition1. Share: It is the share of a shareholder in the assets of the corporation and is repre-

sented by a certificate that can be negotiated. The term “share” is also applied to the certificate that represents such share.

2. Bond: It is a financial paper issued by trading establishments and governments in order to raise long-term loans in lieu of interest that is paid to the bearer of the bond after periods. They are sometimes issued at a discount with respect to their face value.

Second: Rules governing the issuance of shares1. The issuance of shares is permitted in principle.2. It is not permitted to issue performance shares that have special financial features,

leading to the granting of priority to these shares at the time of liquidation or distribu-tion of profits.

3. It is not permitted to issue tamatu’ (preference) shares. These are shares that grant the participant compensation in lieu of his shares, whose value is redeemed during the existence of the company, and they are entitled to profit lesser than that given to the owner of shares based on capital.

4. Rules for dealing in company shares:

• Companies that deal in halal transactions: It is permitted to issue and deal in shares of corporations if the purpose of establishing the company is lawful.

• Companies that deal in unlawful transactions: It is not permitted to issue and deal in shares of corporations which deal in unlawful transactions, like the manufacturing of liquor, trading in swine or pork-related products.

• Participation or trading in the shares of corporations whose primary activity is lawful but they make deposits or borrow on the basis of interest: The fundamental rule is that of prohibition of acquiring shares of and transactions (investment and trading) in the shares of these corporations, unless they fulfill the following conditions:

� The corporation does not state in its articles of association that one of its objec-tives is to deal in prohibited goods or materials.

� The total amount raised as loan on interest does not exceed 30% of the market capitalization of total equity.

Jabir Bin Abdulla, may Al-lah be pleased with him, said:“The Messenger of Allah, peace be upon Him, has cursed the one who con-sumes Riba (interest), the one who gives it, the one who records it and the two witnesses.” He said: “they are all the same”(Narrated by Muslim)

Do you know?Iran, Sudan and Paki-stan are considered the only countries which have Islamicized their bank-ing systems, and all units in them are operating in compliance with Islamic Shari’a.

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Securities (Shares and Bonds)

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� The total amount of interest-taking depos-its shall not exceed 30% of the market capitalization of total equity.

� The total amount of income generated from prohibited component does not exceed 5% of the total income of the corporation.

5. The elimination of prohibited income is obliga-tory, whether such income is a result of the activities, unlawful acquisition or interest, and the bank shall undertake to dispose of such interest.

6. It is not permitted to purchase shares by rais-ing interest-bearing loans.

7. It is not permitted to sell shares that the seller does not own (short sale).

8. It is permitted to pledge shares that are lawful according Shari’a.

9. It is permitted to sell shares by way of Mura-baha.

10. It is not permitted to rent shares by way of Ija-rah

Third: Rules governing bondsThe issuance of all kinds of bonds is prohibited, which are based on usurious loans, when these bonds include stipulations for the return of the amount of loan and excess in any form, whether such excess is paid at the time of the satisfaction of the principal amount of loan, and whether it is paid in monthly or yearly installments.

Famous quotesThe socialist economy has dwindled to extinction, and the countries which are using socialist economic systems are suffering from abject poverty. On the other hand, the capitalist economy is racing towards the abyss, while the Islamic economy is the alternative, because it is the economy of facts and actualities, and it relies, in its dealings, on materialism and commodi-ties then materialism once again, unlike the capitalist system which relies on ma-terialism and materialism and then imagination and illusion.(Dr. Mahmood Hajji, former profes-sor of Investment Management at the Global American University in Dubai and member of the Busi-ness Entrepreneurs and World Trade Association in the United States).

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Famous quotesI call for the implementation of Islamic Shari’a in the financial and eco-nomic fields to put an end to this crisis which is shaking the global mar-kets due to manipulation of the rules of dealing and excess in fictitious and unlawful speculation. (Dr. Finance Roland Laskin, Editor in Chief of Le Journal.

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First: Definition International commodity sales are contracts that are concluded in organized commodity mar-kets under the supervision of specialized organizations and through intermediaries who co-ordinate the demand for sales and the demand for purchases by employing standard con-tracts that contain various conditions and specifications along with a statement of the period and place of delivery.

Second: Types of international commodity sales1) Spot contractsThey are the contracts that require immediate delivery and acceptance of delivery, however, delivery and possession my take place within the limit of a day or two days. They are executed as follows:1. The bank buys the commodity from the international market through an intermediately and

the intermediary delivers the commodity documents to the bank.2. The bank sells the commodity to a third party (in most cases the bank) through the interme-

diary a higher price by way of a deferred payment or in installments.3. The other bank settles the debt entirely or the installments to the bank. (See illustrative diagram No. (20)).

Shari’a basis: Conclusion of spot contracts in the commodity markets is permitted with the following conditions:1. The commodity sold must be in existence and in the seller’s possession. 2. The commodity sold must be ascertained (the existence of the documents is an evidence

of its existence).3. The contract should not include a condition that prevents the buyer from taking delivery of

the commodity sold.4. The price should be paid on a spot basis.

2) Forward contractsThey are contracts of both counter-values deferred counter values, and they take effect on a certain date in the future, and are completed with the delivery of the commodity and the price at a deferred specific deferred date, and they are not organized in an exchange. These con-tracts have two forms:a) The commodity is a liability through description, while the price is deferred.

Do you know?Interest in the Islamic economic system by the Europeans and Westerners has ex-panded to include uni-versities and institutes. The university of Sta-atsburg in France has recently made an aca-demic coup by includ-ing the discipline of Is-lamic financial systems in its curricula, becom-ing the first European university to do so.

Allah, the Almighty, says, “Allah will deprive usury of all blessing, but will give increase for deeds of charity: for He loves not any ungrateful sin-ner.”(Surat Al Baqara - Verse: 276).

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Sale of International Commodities

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The Messenger of Allah, peace be upon Him, says,“It is not permitted to have salaf (loan) and sale, nor two conditions in a sale, nor to make profit from something that you do not guarantee, nor to sell what you do not have.”(Narrated by Abu Dawud and Al Tirmidhi)

b) The commodity is ascertained, but a delay in its delivery is stipulated along with a delay in the price. This is executed as follows:

1. The bank buys the commodity from the international market through an agent or intermediately. The price is deferred and the commodity is a liability through description, or the price is deferred and the commodity ascertained, with deferred delivery.

2. The bank sells the commodity to a third party (in most cases the bank) through an agent or intermediary at a higher deferred price.

3. The other bank settles the installments to the bank (See illustrative diagram No. (20)).

Shari’a basis: It is not permitted to deal in international commodities by us-ing the two above-mentioned forms.

No. (20)- Practical Steps of Sales of International Commodities (Spot Contracts-Deferred Prices-Futures)

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3) FuturesThese are contracts the legal effects of which take place at a determined future date either through liquation between the parties or cash settlement, but they rarely end in actual delivery and possession. They are organized on exchang-es, and are carried out as follows:

1. The bank buys the commodity from the international market through an agent. The price is deferred and the com-modity is a liability through description, or the price is deferred and the commodity ascertained, with delivery un-known.

2. The bank sells the commodity to another party (in most cases the bank) through an agent at a higher but deferred price.

3. The other bank settles the installments to the bank (See illustrative diagram No. (20)).

Shari’a basis: Conclusion of these contracts is not permissible.

The Shari’a basis of these sales relates mainly to the issue of deferring the counter-values. To know the Shari’a ruling on the deferment of the counter-values, we attach the following table:

Subject of the contract Designation Ruling

Sold commod-ity (goods)

Price Designation Ruling

Existent Existent Express sale contract Permissible

Existent Absent Deferred sale contract Permissible

Absent Existent Salam sale contractPermissible subject to certain condi-

tions

Absent AbsentSale for deferred counter-values

(Bay’ Al Kali’ Bilkali’)Forbidden

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Third: Most important applications of international commodity sales1) Agency for third parties (investment agency): The bank in such agency is agent for other banks.This has two forms:• Agency with the determination of compensation for the agent as a lump sum or as percentage of the pur-

chase price of the commodity. This method is executed as follows:1. The bank buys a commodity from the international market for a spot price through the agent.2. The bank sells the commodity to a third party (in most cases a bank) though an agent for a deferred higher price.3. The other bank settles the installments.4. The bank pays fees to the agent for the agency in a lump sum or as percentage of the purchase price of the com-

modity, and the bank receives the agency fee from the other bank (See illustrative diagram No. (21)).

• Agency with an exchange of offer and acceptance notices. This is executed as follows:1. The bank buys a commodity from the international market against a spot price through the agent.2. The agent buys the commodity for its own account from the bank at higher price, and offer and acceptance no-

tices are exchanged for the sale.3. The agent pays the transaction installments to the bank (See illustrative diagram No. (22)).

Illustrative diagram No. 21- Practical steps of the investment agency (1) Illustrative diagram No. 22- Practical steps of the investment agency (2)

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2) Commodity Murabaha transactions: In these transac-tions, the bank is an agent to buy these commodities for the account of banks. It has two forms:• Deferred Murabaha: It is executed as follows:

1. The bank buys the commodity from the international market through the agent against a sport price on the request of the bank (2).

2. The bank sells the commodity by way of Murabaha to bank (2).

3. The bank (2) pays the Murabaha amount by install-ments.

4. The bank (2) sells the commodity to another bank or customer (See illustrative diagram No. (23)).

• Reverse Murabaha: Its steps are carried out as follows:

1. The bank (2) deposits the investment amount with the bank.

2. The bank buys a commodity from the international market through the agent against a spot price on the request of the bank (2). The value of the com-modity must be equal to the deposit amount.

3. The bank buys the commodity for its own account by way of Murabaha.

4. The bank sells the commodity to a third party (bank or customer).(See illustrative diagram No. (24)).

Illustrative diagram No. 23- Practical steps of the deferred Murabaha Illustrative diagram No. 24- Practical steps of the Reverse Murabaha

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Sale of International Commodities

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3) Mudaraba with third parties: It has two methods• The bank as a Mudarib:

Bank (2) appoints the bank to invest its funds by way of selling the commodities against a spot price and sell them against deferred prices while specifying the fee as a share in the profit (by way of Mudaraba).

• The bank as Rab Al Maal: The bank appoints another bank (2) to invest funds by way of buying commodities against a spot price and sell them against a deferred price while specifying the fee as a share in the profit (by way of Murabaha)

It is carried out as follows:1. The bank, in its capacity as Mudarib, agrees with the

bank in its capacity as capital provider and the latter provides the former with an amount of money to invest it.

2. The bank buys a commodity on the international mar-ket through an agent for a spot price.

3. The bank sells the commodity to a third party (bank or customer) against a higher price by way of Murabaha.

4. Profits are distributed as agreed (See illustrative diagram No. (25)).

4) TawarruqThe bank buys a commodity against a spot price for its own account, and then sells it to the customer against a deferred price (or the bank buys the com-modity to the customer against a deferred price on its behalf) then sells the same commodity to third parties against a spot price (or the customer sells it directly to third parties against a spot price). This transaction is carried out to obtain cash (See illustrative diagram No. (26)).

Illustrative diagram No. 25- Practical steps of Mudaraba with third parties

Do you knowIslamic financial institutions are managing funds totaling more than $ 200 billion, with an average growth of around 15%. Their assets are estimated around $ 1 trillion, and it is ex-pected that this will rise to $ 5 trillion in the year 2013.

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Fourth: Prohibited Sales1. Dealing with prohibited commodities.2. Selling the commodity bought before it is specified and segregated from other com-

modities.3. Bay’ al-‘inah, which is buying the commodity from a certain party at a spot price and

then selling it to the same party against a deferred price.

Fifth: Derivatives 1. Definition: They are secondary contracts based on underlying contracts related to

the price of currency, commodity, financial instrument or interest rate of a currency at a certain time in the future. Alternatively, they are defined as follows: Fixing the value of a commodity at present to be sold in the future at the same fixed price.

2. Objective: The objective behind derivatives is to hedge against market fluctuations, i.e. protection against the risks of expected fluctuations in the prices of such assets, or against the risks of change in the prices of these assets, or against the risks of changes in interest rates, share prices, exchange rates and commodity prices.

They are executed for three main reasons:

1. Protection against the interest rate fluctuations.2. Protection against currency rate fluctuations.3. Protection against bond-related risks.

They are mainly three types:

1) FuturesA) Definition: A future is a contract binding under law to deliver and receive a finan-

cial asset at a certain time in the future. The price is fixed at the time of concluding the contract. Futures give their bearer the right to purchase or sell a quantity of specified assets not existing, which may be a commodity or financial asset, against a price fixed in advance. Delivery and receipt are agreed upon to take place at a later date, and the buyer and seller undertake to perform their obligations.

Allah, the Almighty, says,“O you who believe! Fear Allah, and give up what remains of your demand for usury, if you are in-deed believers. If you do not do it now, take notice of war from Allah and His Messenger: But if you repent you shall have your capital sums: Deal not unjustly, and you shall not be dealt with unjustly.” (Surat Al Baqara - Verses :278-279).

Abu Burdah, peace be upon Him, said:“The Messenger of Allah, peace be upon him, was asked about the best earning, and he said: A rightful sale and when the man earns from the work of his own hand.”(Narrated by Ahmed).

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Sale of International Commodities

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B) Benefit: To avoid spot purchase of commodities which the buyer does not need except in the future.

C) Those dealing in them are of two types:1. Speculators to make profit.2. Hedgers to avoid the fall of prices in the future or their rise.

D) Parties1. Buyers and sellers.2. Inventors to provide coverage of positions and for speculations.3. Clearing house which provides guarantees to perform concluded contracts.4. Brokerage houses. No dealings may be done except through them.5. Dealing room, in which brokers meet.

E) Shari’a ruling: It is impermissible to deal in them for the following reasons:• They are like binding promises by the two parties.• The two counter-values in them are deferred.• Contracting in them is done without owning the commodity by the seller and without

delivering the commodity to the buyer. In these contracts, liquidation is enough, by re-ceiving or paying the price differentials. Commodities in them may be shares, bonds or currencies, and currencies may not be delayed in the future place.

2) OptionsA) Definition: An option is a contract whereby the buyer is bestowed upon the buyer and

obligation by the seller. This means that the buyer pays a percentage of the commodity price against enjoying this right, and the seller is paid this price against its undertaking and obligation to deliver the amount to the buyer at a determined time, with the result being an instrument that can be sold and traded.

Another definition is that an option is a contract whereby a transaction may be performed either by way of sale or purchase of a certain quantity of a financial asset at a later date, against a price determined at the time of contracting, against payment of a premium to the seller on drawing up the contract. Such premium is non-refundable, and the seller of the option right shall have the right to deposit a margin with the brokerage house to guartnee the performance of the two parties of their obligations. The buyer is not obliged to perform at the time of exercise of the right, but only the seller.

Do you know?The total assets of Is-lamic investment and financial companies in the GCC countries alone exceeded $ 23,408 by the end of the year 2008, against $ 18,301 in the year 2007.

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B) Option Scope of Dealing: shares, bonds, currencies, indexes or debts for a determined period.

C) Shari’a ruling: They are not permissible except in the following:1. Agreement on certain assets along with the payment of ‹arbun (earnest money).2. Contract on the commodities themselves with the stipulation of option.3. Issuance of a binding promise by the owner of the assets, by way of sale or purchase,

without specifying a counter-value for the promise.D) Shari’a substitutes for options

• If options are a speculation to benefit from the price differences, this is gambling that is impermissible and it has no Shari’a substitute.

• If the objective is actual possession to make profit while giving guarantee, this is achieved through known sales, i.e. spot sale, deferred sale and Salam.

3) SwapsA) Definition: Swaps are agreements between two parties for the temporary exchange of

determined financial, material assets or interest rates, determined according to the value of the transaction on the spot, provided that the asset subject of contract is exchanged at a later date. Sale may take place without the transaction resulting in any exchange of the commodity.

B) Types1. Exchange of interest rates: under these transactions, an agreement is reached be-

tween two parties to swap variable interest rates against fixed interest rates against a determined amount in a certain currency, without this necessarily being linked to the exchange of the amount. Example: The borrower agrees with the lender to pay interest on the basis of a fixed rate, and this is done in case the borrower expects a rise in inter-est rates.

2. Currency swaps: It is an agreement between the two parties on two transactions:• Purchase and sale of a certain currency against another on the basis of spot delivery

against a spot exchange rate between the two currencies.• Sale and purchase at a later date, on the basis of an exchange price determined in

advance between two currencies. Such transactions depend on future projections of interest rate differentials and exchange rates.

Do you know?The total assets of Al Hajj Fund (Tabooj Haji) was established in Malaysia in 1962 for the purpose of pooling the funds of individu-als wishing to perform Hajj, while investing these savings in a Shari’a-compliant way. This experiment has developed dramatically and spread all over Ma-laysia, becoming today one of the biggest insti-tutions offering banking services.

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Sale of International Commodities

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3. Commodity swaps: Example of this type of swaps is what party (A) buys commodi-ties from party (B) against a spot price at the prevailing price, and pays the price immediately. Party (A) sells the same commodity to (B) at the same time, by way of a deferred sale, at a price agreed upon in advance. Payment is made within periods agreed upon.

4. Re-purchase agreements: They are agreements to sell a certain quantity of bonds along with the undertaking by the seller to re-purchase them after a certain period of time against a price higher than the sale price agreed upon.

C) Shari’a ruling: Dealing in these transactions is impermissible for the following reasons:• There is no actual exchange of commodities.• The contracts re not free of interest.• The contracts are not free of ‘ina sale.

Sixth: Indexes1) Definition: Indexes are a set of prices of a selected band of companies on certain

bases divided by a fixed number, designed to measure the variation in prices.They are also accounting numbers worked out through special statistical methods with the intention of identifying the mean variation in the rates of a specified group of com-modities or assets.Indexes give a quick idea about the general trends on the market and it is an inclination by customers to take the ideal decision in respect of investment. It has become a tool that is traded in and in its variations.

2) Shari’a ruling: A reputable index may be used to determine certain prices. However, the index itself may not be sold or bought, because it is pure gambling, as it involves the sale of an imaginary thing that is not existent.

Do you know?The first dealings in op-tion contracts go back to the ancient Greeks (550 B.C.) and to the Thales of Miletus, the great mathematician and astronomical phi-losopher. Thales was one of the seven sages of ancient Greece. He predicted a dearth in the olive harvest, and so he bought options giving him the right to buy olive harvest at a certain date against a price determined in ad-vance, resulting in an embarrassing situation for the market.

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First: DefinitionCommercial papers: They are tradable certificates that represent pecuniary rights pay-able at sight or after a short period. Customary practice regards them as instruments of payment and they act substitutes for cash in transactions. They are of different types:

1. Bill of exchange: A bill of exchange is a certificate issued in a particular legal form. It consists of an order from a person (known as the drawer) to another person (known as the drawee) to pay a certain sum of money at sight, or at a particular or determinable date, to a third person (called the beneficiary).

2. Promissory note: It is a certificate whereby the issuer promises to pay a certain sum of money at a particular or determinable date, or at sight, to another person (called the beneficiary).

3. Cheque: It is a certificate that is issued in particular form containing an order issued by a person (known as the payer) to another person (known as the payee) to pay a certain sum of money to a third person (known as the beneficiary) when the cheque is presented.

Second: Shari’a rulings1. It is permissible to undertake transactions in the commercial papers of the three

types (bill of exchange, promissory note and cheques) on the condition that it does not amount to riba (usury).

2. The bank may collect commercial papers against a fee.3. Commercial papers may not be discounted, whereby the paper bearer transfers its

ownership through endorsement to a third party before maturity date against the bank paying the value thereto to him, less a certain amount.

4. It is permissible for the bank to obtain cheques or promissory notes from the cus-tomer as guarantee for the payment of the installments of the transaction.

The Messenger of Allah, peace be upon Him, says,“Whoever sleeps se-cure in his flock, safe in his body and has the sustenance of the day is like the one who pos-sesses all life.”(Narrated by Al Tirmithi)

Allah, the Almighty, says, “If the debtor is in a dif-ficulty, grant him time till it is easy for him to repay. Bt if you remit it by way of charity, that is the best for you if you only knew.”(Surat Al Baqarah- Verse: 280)

Chapter XIX

Commercial Papers

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Do you know?Banking activities were introduced to Arabs in the pre-Islamic era through the Greeks and Romans. Islam approved many of these activities, like agency, sure-tyship, guarantee, draft and interest-free loan. Muslims knew the draft (Saftaja) which is a letter or certificate issued by a person to his delegate or debtor in an-other country demanding that payment of a certain be made to the bearer of the letter. Ibn Abbas, may Allah be pleased with them, used to take Mecca to write letters for which to be paid in Kufa. On the other hand, Abdulla Ibn Al Zubayr, may Allah be pleased with them, used to take silver dirhams in Mecca and write letters to persons to take them in Iraq.

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The Messenger of Allah, peace be upon Him, says,“Gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates, and salt for salt - like for like, equal for equal, and hand-to-hand; if the commodities differ, then you may sell as you wish, provided that the exchange is hand-to-hand.» (Narrated by Muslim)

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120

First: DefinitionIt is buying and selling currencies to make profit.

Second: Shari’a rulings1. It is permissible to trade in currencies, provided that it is done in compliance with

the following Shari’a rules and precepts:• Both parties must take possession of the counter-values before dispensing, such

possession being either actual or constructive.• The counter-values of the same currency must be equal amount, even if some of

them is in paper money and the other is in coin of the same country, like BD 1 and ten coins of 100 fils denomination, for example.

• The contract shall not contain any conditional opinion of deferment clause re-garding the delivery of one or both currencies.

• The dealing in currencies shall not aim at establishing a monopoly position.• Possession of currencies should not be deferred for one or both currencies.

2. It is prohibited to enter into forward currency contracts. Example: (A) sells (B) BD 1 against Saudi riyals 10, provided that (A) receives the riyals after one day.

3. Possession of the currencies (counter-values) must be taken for the whole amount that is the subject-matter of the contract at the closing of the transaction.

4. Constructive possession is permissible, like crediting to the account or depositing in it, or making a transfer or receiving a cheque that has available balance, etc.

Hadith: Once Bilal brought Barni (i.e. a kind of dates) to the Messenger of Allah and the Messenger of Allah asked him, «From where have you brought these?» Bilal replied, «I had some inferior type of dates and exchanged two Sas of it for one Sa of Barni dates in order to give it to the Mes-senger of Allah to eat.» There-upon the Messenger of Allah said, «Beware! Beware! This is definitely riba! This is defi-nitely riba ! Don’t do so, but if you want to buy (a superior kind of dates) sell the inferior dates for money and then buy the superior kind of dates with that money.»(Narrated by Al Bukhari).

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Trading in Currencies

121

Table showing the ruling on the trading in currencies and their equivalent

Case Ruling Conditions

Selling gold for gold Permissible

1. Spot possession.2. Equal amounts of counter-values of the same currency

(it is not permissible to sell a 21 carat gold for an 18 carat gold, but gold must be sold, using the price to buy another gold).

Selling silver for silver Permissible

1. Spot possession.2. Equal amounts of counter-values of the same cur-

rency (it is not permissible to sell one type of silver for another type, but silver must be sold, using the price to buy another type of silver).

Selling gold for silver and vice versa Permissible Spot possession.

Selling gold or silver against another metal Permissible Spot possession is not a requirement.

Selling one metal for another metal. Permissible Spot possession is not a requirement.

Wheat for wheat, barley for barley, dates for dates and salt for salt Permissible

1. Spot possession.2. Equal amounts of counter-values of the same com-

modity (it is not permissible to sell one kilo of good dates against two kilos of inferior quality dates, for ex-ample, but inferior dates may be sold, using the price to buy good quality dates).

Wheat for barley and salt for dates, etc. Permissible Spot possession.

Other types (meant for rice or fruits for vegetables, etc.) Permissible Spot possession is not a requirement.

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First: DefinitionAgency is the act of one party delegating the other to act on its behalf in what can be a subject matter of delegation and it is, thus permissible.

Second: Conditions on the agencyA) Conditions on the Principal

1. The principal should possess legal capacity to enter into contract.2. The principal should have the right to dispose of the asset in question.

B) Conditions on the agent1. The agent should have full legal capacity2. The agent should be aware of his status as an agent.

C) Subject of the agency1. The subject matter of the agency should be known to the agent.2. It should be owned by the principal, or he has the right of disposing thereof.3. It should be something that can be disposed of through agency.4. It should not involve a Shari’a-banned practice, like trading in impermissible com-

modities or committing usurious lending.

Third: Types of agency1. Specific versus general agency.2. Limited versus absolute agency.3. Paid versus non-paid agency:• When agency is paid, it falls under the Shari’a rulings on Ijarah.• The amount payable as remuneration for agency should be known, whether in

lump sum or as a share of a specific amount of income.• The agent does not guarantee what he is delegated to dispose of, except in

cases of misconduct, negligence or breach of the terms or stipulations of the contract.

Allah, the Almighty, says, “Now send you then one of you with this money of yours to the town: let him find out which is the best food (to be had) and bring some to you.”(Surat Al Kahf -Verse: 19)

HadithThe Messenger of Allah, peace be upon Him, gave Urwa Al Bariqi one dinar to buy a sacrificial animal or sheep.”(Narrated by Al-Bukhari)

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Agency

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Fourth: Commitments of the two parties (principal and agent)1. Principal: He should bear the expenses, such as transportation, storage, taxes

and insurance.2. Agent: The agent is considered as a trustee in holding the asset he is entrusted

with, but he does not guarantee it except in cases of misconduct, negligence or breach of the terms or stipulations of the contract.

3. Termination of he agency: The agency contract expires in the following cases:

a. When the agent dies.b. When the principal passes away.c. If either party, or both, lose their required legal qualifications.d. If the principal is liquidated or declared bankrupt.e. If the principal dismisses the agent, or if the agent resigns.f. When the agent completes the work assigned to him.

Famous quotesThe economic turmoil cre-ated by the U.S. capital markets crisis has put an end to the free market economy. The globaliza-tion system is approach-ing its end with the decline of capitalism that has imposed its logic on the economy as a whole, and contributed to its deviation from its course. It is high time to make capitalism ethical, by directing it to its true function (serving eco-nomic development and forces of production and keeping away completely from the forces of specu-lation(French President Nicolas Sarkozy).

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First: Definition

1. Personal guarantee: it is adding a liability to another liability.2. Letter of guarantee: it is an undertaking by the bank, on the customer’s request, to

pay a certain sum of money once the beneficiary demands the bank to do so within a limited period of time.

Second: Shari’a rulings1. The bank may stipulate for the customer to bring one surety or more or sign a joint

guarantee from his company or a person to guarantee the payment of the price.2. No remuneration may be charged or given against the personal guarantee at all,

and the surety (bank) may charge actual expenses incurred in the course of surety-ship against the feasibility study and preparation of the files.

Third: Shari’a rulings governing the letter of guarantee1. No fee or remuneration may charged for the letter of guarantee against only the

guarantee, in which usually the amount of guarantee and its period are taken into account.

2. The customer may be charged certain costs incurred in issuing the guarantee, such as the costs of the feasibility study and maintenance of files, etc., provided that no extra amounts should be charged except the remuneration of the like.

3. The bank may not issue a letter of guarantee to the customer who applies for it to guarantee a usurious loan or a prohibited transaction.

Allah, the Almighty, says,“Right graciously did her Lord accept her: He made her grow in purity and beauty: to the care of Zakariya was she assigned. Every time that he entered her chamber to see her, he found her supplied with substance. He said: ‘O Mary! Whence comes this to you?’ She said: ‘From Al-lah: for Allah provides suste-nance to whom he pleases, without measure.’”(Surat Al-‘Imran – Verse: 37).

The Messenger of Allah, peace be upon Him, says, “A man used to lend mon-ey to people, and when he found that one off them was insolvent, he used to say to his staff: ‘Forgive him, per-haps Allah will forgive us.’ Allah, the Almighty, forgave him.”(Narrated by Al-Bukhari)

Chapter XXII

Personal Guarantee and Letter of Guarantee

125

Do you know?The first Islamic banks in the world:1. Local Savings Banks (Egypt), 1963.2. Nasser Social Bank (Egypt), 1963.3. Islamic Development Bank (Jeddah), 1974.4. Dubai Islamic Bank, UAE, 1975.5. Faisal Islamic Bank of Sudan, 1977.6. Kuwait Finance House, 1977.7. Jordan Islamic Bank, 1978.8. Faisal Islamic Bank of Egypt, 1979.9. Bahrain Islamic Bank, 1979.

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First: DefinitionPledge is to withhold a sum of money for a right that can be collected from it, wholly or partially.

Second: Shari’a rulings related to pledges1. It is permissible for an institution to stipulate that the customer shall provide a pledge

of security to secure payment of the debt arising out of financing.2. The pledge contract is binding towards the debtor customer, even if it is not col-

lected, and so the customer has no right to rescind it, and his successors subrogate him in his obligations if he dies.

3. The pledged asset must fulfill the following conditions: • It must be a valuable asset that can be lawfully owned and sold, such as immov-

able and movable properties.• It should be subject to identification by sign, name or description.• It should be capable of being delivered.

4. All the actual expenses (excluding the expenses incurred for the safekeeping of the pledge, are to be borne by the bank, with the right of the bank to claim such expenses from the customer.

5. The bank is entitled, if the debtor fails to pay the debt on time, to demand the sale of the pledged asset in order to recover the amount of the debt from the sale proceeds, and to return any surplus proceeds to the customer.

6. The pledge may be released at any time with the consent of both parties.7. It is not permissible for the bank to use the pledged asset.8. It is permissible for the bank to stipulate that the customer shall take out Islamic

insurance (takaful) on the pledged asset.

It is narrated by Aisha, may Allah be pleased with Herthat the Messenger of Allah, peace be upon Him, bought some food from a Jew for a specified period of time and pledged his iron shield with him.” She also said: “The Messenger of Allah, peace be upon Him, died, while his shield was mortgaged.” (Narrated by Al Bukhari).

Famous QuotesIslamic banks are greatly im-munized against the highly risky sub-prime crisis in the United States, enabling them to expand beyond their main garrison in the Arab and Asian markets

(Rasheed Al Mi’raj, Governor of the Bah-rain Central Bank)

Chapter XXIII

Pledge

127

Do you know?The Financial Markets Authority in France (Autorite des marches financiers- AMF) (which is the highest official authority concerned with the supervision of banks’ ac-tivities) has earlier issued an order banning the trading of fictitious transactions and informal sales which are one of the hallmarks of the capitalist systems and has stipu-lated possession within no more than three days from the execution of the contract. This is consistent with the tenets and principles of Islamic jurisprudence.

128

Do you know?The idea behind creating credit markets began in England in the late 19th century. A British garments company issued coupons to its cus-tomers enabling them to buy what they needed without paying any price therefor.

In the early 20th century, some U.S. companies offered a special card providing food services to their customers. Customers did not pay the value of the food, but only produced the card and the amount was booked.

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First: Shari’a rulings for different types of cards

Type of card Definition Characteristics Shari’a ruling

Debit Card

It is an Auto-matic Teller Machine (ATM) card issued to savings or current ac-count hold-ers

1. This card is issued by the bank to a customer with available funds in his account.

2. The card confers on its holder the right to withdraw cash from the account to pay food goods or services purchased up to the limit of the available funds (credit balance).

3. The customer will not normally pay any charg-es for using this card, except when it is used to withdraw cash or to purchase another cur-rency through another bank.

4. This card is issued against a fee or without fee.5. Some banks charge the party accepting pay-

ment by means of the card a commission cal-culated as a percentage of such payments.

It is permissible for banks to issue this card, so long as the cardholder does not exceed the balance available on his ac-count and no interest charge arises out of the transaction.

Charge Card

The charge card is is-sued by some banks and institutions which provide their custom-ers a credit facility up to a certain ceiling for a specified period of time.

1. The card provides a credit facility up to a cer-tain ceiling for a specified period of time.

2. The card is used to pay for goods and services and to obtain cash.

3. This card does not provide revolving credit facilities to the cardholder, insofar as the card-holder is obliged to make payment for the pur-chased goods or services by the end of the prescribed period

4. If the customer delays payment of the amount due beyond the period of free credit, and inter-est charge is imposed on the cardholder, but not Islamic banks do not charge any interest.

It is permissible to issue this card subject to the following conditions:

1. The cardholder is not required to pay in-terest in case of his delay in payment of the amount due.

2. If the bank takes security from the cus-tomer, it should be stated that such guarantee will be invested in the cus-tomer’s favour.

3. The bank should stipulate that the cus-tomer shall not use the card in a way that contravenes Islamic Shari’a.

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Cards

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Type of card Definition Characteristics Shari’a ruling

Credit Card

The charge card is issued by some banks and institutions which provide their customers with a credit facility up to a certain ceiling for a specified period of time.

1. The card provides a credit facility up to a cer-tain ceiling on a revolving basis as specified by the bank.

2. The customer may pay for the goods and ser-vices, and withdraw cash up to a certain ceil-ing and withdraw cash within its limit.

3. In case of purchase of goods and services, the customer shall be granted a grace period with-out interest. The card also allows him to defer payment within a specified period against in-terest. When cash is withdrawn, the cardhold-er is not given any grace period.

It is not permissible for the bank to issue credit cards that provide an interest-bear-ing revolving credit facility, whereby the cardholder pays interest for being allowed to pay off the debt in installments.

Second: General provisions governing cards1. It is permissible for banks and institutions to join the membership of international card regulatory organizations, provided

the institutions avoid any infringement of Shari’a that may be prescribed by those organizations.2. It is permissible banks and institutions to pay membership fees, service charges and other fees to international card

regulatory organizations, so long as these do not include interest payments.3. It is permissible for the bank issuing the card to charge a commission to the party accepting the card at a percentage

of the purchase price of the items and services purchased using the card.4. It is permissible for the institution issuing the card to charge the cardholder membership fees, renewal fees and replace-

ment fees.5. It is permissible to purchase gold, silver or currency with all the cards mentioned in cases where the issuing bank is able

to settle the amount due to the party accepting the card without any delay.6. It is permissible for the cardholder to withdraw an amount of cash, provided no interest is charged.7. It is permissible for the bank issuing the card to charge a flat service fee for cash withdrawal, proportionate to the service

offered, but not a fee that varies with the amount withdrawn.8. It is permissible to grant privileges to the cardholder, such as air bookings, travel and discounts on such services, but it

is not permissible to grant privileges prohibited by Shari’a, such as conventional life insurance or purchase of liquor, etc.

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Third: Differences between Islamic and conventional card cards

Scope Conventional Cards Islamic Cards

Status in Shari’a A loan with interest on delay Interest-free loan without interest

Interest on delayed pay-ment

An interest is charged on delayed payment by the customer. This interest is compounded

(which is prohibited interest)

No interest is charged on delayed pay-ment by the customer. Sometimes the

customer is obliged to pay an amount to charities in case of procrastination and

default.

Fees Fees may be charged on issue and renewal, etc.

Fees may be charged on issue and renewal, etc.

Privileges Conventional insurance may be offered, which is not Shari’a-compliant.

Shari’a-compliant insurance (takaful) may be provided.

Uses No restrictions are imposed on the use of the card.

Restrictions are imposed on the use of the card, namely that they should not be used for non-Shari’a-compliant activities

Do you know?Some card issuing companies began this business in 1950. In the year 1949, Frank Mcnamara and Ralph Sneider went out to eat at a restuarnat in the city of Manhattan. At the end of their meal, McNa-mara and his friend reached into their pockets so that they could pay for the meal (in cash). They were shocked to discover that they had forgotten their wallets. They were involved in an endless argument with the restaurant owner, and so they came up with a new idea of setting a company that would guar-antee for the participating restaurants payment of the accounts of customers who were members of the company. So, they set up Diners Club for restaurants only. Desiours to expand the company, they opened many branches outside the United States, and the company remained without any rival or competitor until the year 1958.

Chapter XXIV

Cards

133

Do you know?Franklin Bank is considered the first bank to issue a card in the year 1951. The idea spread to more than 100 banks, but it suffered due to the inability to make profits. However, it made a major push in the year 1958. Cards began to be is-sued on a global level in the 1960’s, when major credit card companies were established, such as Visa Card, MasterCard, Barclaycard, etc.

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First: DefinitionThey are the fees charged by the financial institution to its customer for providing services to him. They are customarily called “administrative fees” related to the administrative ef-forts, work and services provided by the institution in the service of its customers.

Second: Conditions for charges (fees)1. They should be specified.2. They should be linked to the cost and service provided, and they recur if the service

provided recurs.3. They should be determined by expert staff.4. The service provided should be Shari’a-compliant.

Third: Types of Charges (Fees)A) Charges (fees) are of three types, according to the purpose:1. Administrative fees and commissions: They are charged for making efforts, undertak-

ing studies, incurring costs and providing services, such as opening files, conducting studies, opening accounts and handling correspondence.

2. Financing-related fees and commissions: they are charged against providing financ-ing, such as interest-free loans and Murabaha.

3. Documentary credit-related fees and commissions: They are fees and charges charged for documentary credits.

B) Fees are of three types according to the method of calculation:1. Fees and commissions which are payable in lump sum, like BD 10 or BD 100.2. Fees and commissions payable as a percentage share of the value of the service

and are linked to the amount, such as 1% or 3% of the amount.3. Fees and commissions payable according to the tier or category system: The fees

are increased if the amount increases, due to the difference in services and procedures. For example, charges for the documentary credits are BD 100 if the value of the goods is less than BD 20,000, or BD 200 if the value of the goods is less than BD 40,000, and so on and so forth.

Said one of the (dam-sels):

“O my (dear) father! Engage him on wages: truly the best of men for you to employ is the (man) who is strong and trusty.” He said: “I in-tend to wed one of these my daughters to you, on condition that you serve me for eight years; but if you complete ten years, it will be (grace) from you, but I intend not to place you under a diffi-culty; you will find me in-deed, if Allah wills, one of the righteous.”

(Surat Al-Qasas - Verse: 26-27).

Chapter XXV

Charges for Banking Services and Products

135

C) Fees are of two types according to the method they are charged:1. Fees paid to third parties: They are the fees charged by the bank to the customer on the request of a third party,

such as the property insurance fees, life insurance fees, valuation of properties and commissions paid to clearing agents and agents, etc.

2. Fees payable to the bank: They are the fees charged by the bank for providing services, benefits and work to the customer.

Fourth: Shari’a rulings and guidelines for the fees (charges)A) Banking service charges

S.N. Type of service Status in Shari’a Shari’a ruling

Type of fees

Lumpsum % Tier

1 Currency exchange Service against fee permissible Permissible permissible permissible

2 Bank drafts Remunerated agency permissible permissible permissible permissible

3

Collection of commercial papers

Issue of chequesBouncing cheques

Safekeeping of commercial papers

Suspension of commercial papers

Replacement

Remunerated agency permissible permissible permissible permissible

4 Services related to securities and the like

Remunerated agency permissible permissible permissible permissible

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S.N. Type of service Status in Shari’a Shari’a ruling

Type of fees

Lumpsum % Tier

5 Collection of invoice fees of different kinds

Remunerated agency permissible permissible permissible permissible

6

Opening fully funded docu-mentary credits

Amendment of creditIncreasing credit tenorConfirmation of credit

Remunerated agency permissible permissible permissible permissible

7 Leasing safe deposit values Ijarah Remunerated agency Permissible Impermissible permissible

8 Providing advisory services Remunerated agency

Remunerated agency Permissible Impermissible Permissible

9 Customs clearance Remunerated agency permissible Permissible Impermissible Permissible

10 Fund and portfolio manage-ment

Remunerated agency permissible Permissible Impermissible Permissible

B) Banking product fees

S.N. Type of Service Shari’a ruling Shari’a requirement

1 Opening a file Permissible

2 Cost of bank staff Impermissible

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Charges for Banking Services and Products

137

S.N. Type of Service Shari’a ruling Shari’a requirement

3 Cost of temporary staff for specific service Permissible It should not be a routine job

4 Stationery Impermissible

5 Advertisements Impermissible

6 Drawing up of records Permissible The principle is that the expenses should be shared equally

7 Credit study Permissible This study becomes the customer’s own property

8 Feasibility study Permissible

9 Valuation Permissible

10 Use of external consultants Permissible

11 Clearing agents’ commis-sions Permissible

12 Marketing commissions Impermissible The fees can be charged on the actual cost only against the study and efforts

13 Fees for providing credit facilities Impermissible The fees can be charged on the actual

cost only against the study and efforts

14 Facilities renewal fees Impermissible The fees can be charged on the actual cost only against the study and efforts

15 Financing fees Impermissible The fees can be charged on the actual cost only against the study and efforts

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S.N. Type of Service Shari’a ruling Shari’a requirement

16 Deferment of installments Impermissible The fees can be charged on the actual cost only against the study and efforts

17 Rescheduling Impermissible The fees can be charged on the actual cost only against the study and efforts

18 Insurance on the asset Permissible It should be Islamic insurance (takaful)

19 Life assurance Permissible It should be Islamic insurance (takaful), if available

20 Guarantee Impermissible The fees can be charged on the actual cost only against the study and efforts

21 Opening of account Permissible

22 Closing of account Permissible

23 Minimum account amount Permissible There should be an actual cost

24 Cash withdrawal from ATM machine Permissible

25 Request for letters, certifi-cates or documents Permissible

26 Delay penalty for the bank’s account Impermissible

27 Commitment to pay charity Permissible Should be paid to charitable organizations

Note: In case the bank incurs any other cost, it may charge it to the customer.

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Charges for Banking Services and Products

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Do you know?The invention of the Automatic Teller Machine goes back to the year 1939 in New York, when Luther George Simjian invented and installed it at Citibank. However, the machine was removed after six months because the idea was met with a great deal of doubt. Twenty five years later, the idea was revived when John Shepherd invented the machine because he could not obtain cash on weekend holidays (Saturdays and Sundays). He mooted the idea and offered it to the man-ager of the bank he was working for (Barclays). The manager asked him to make it a user-friend-ly machine and he would buy it from him imme-diately. John busied himself with making the ma-chine for one full year trying to invent it until he made a prototype which was announced in the year 1967. Barclays Bank opened the machine which was at that time called DACS and was open round the clock. Many people predicted that the new invention would be a failure, but now it is considered one of the most widespread inventions, with statistics indicating that there are more than 1.5 ATM’s all over the world. Cel-ebrations were held in Florida in 2007 marking the 40th anniversary of this invention, and John Shepherd, who was more than 80 years old, was the guest of honour during the celebrations.

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First: Definition1. Islamic insurance: It is a process of agreement among a group of persons to handle the inju-

ries resulting from specific risks to which all of them are vulnerable. A process, thus initiated, involves payment of the entire contributions as donations or donation of amounts which cover damages and the administrative expenses and the like.

2. Conventional insurance: It is a mu’awadha (mutual compensation) contract that seeks to make a profit of the insurance operation itself, and, hence, is subject to Shari’a rulings on financial dealings that involve gharar (uncertainty). Consequently, conventional insurance is prohibited in Shari’a.

Second: Contractual relationship in Islamic insurance1. The Musharaka (partnership) among the participants.2. The relationship between the company and the policyholders’ fund which is a wakala relationship.3. The relationship between the policyholders and the fund which takes the form of donation commit-

ment at the sate of making contributions.

Third: Principles of Islamic insurance1. It is based on donation commitment, The company that arranges the insurance deal should maintain

two separate accounts: one for its own rights and liabilities, and the other for the rights and liabilities of the policyholders.

2. The shareholding company managing the fund incurs its expenses and it owns the capital and is entitled to the returns and the fee charged to the participants on the basis of agency fee for manag-ing the company.

3. The company that arranges the insurance deal should maintain two separate accounts: one for its own rights and liabilities, and the other for the rights and liabilities of the policyholders.

4. The company assumes the role of the agent in managing the insurance account, and the role of the Mudarib or agent in investing the insurance assets.

5. The company’s assets and the policyholders’ funds should be invested in compliance with the prin-ciples of Islamic Shari’a.

Fourth: Types of insurance1. Property insurance.2. Personal insurance which includes insurance against the risk of disability and death.3. Liability insurance.

Do you know?The total value of trading assets of Islamic insur-ance companies is in the range of $ 700 billion.

The Messenger of Al-lah, peace be upon Him, says, “When the food of the Ash’aris ran short during military campaigns or if their food supplies ran low in Medina, they would gather what they had in a single cloth, then share it out equally amongst themselves by measuring it with a bowl; they are of me and I am of them.”(Narrated by Muslim).

Chapter XXVI

Insurance

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Fifth: Comparison between Islamic insurance and conventional insurance

Scope Islamic insurance Conventional insurance

Status according to Fiqh

Based on donation commitment by the par-ticipants for themselves and to protect them-

selves by paying contributions constituting the insurance fund managed by a committee of

policyholders..

A mutual compensation contract that seeks to make profit out of the insurance operation itself,

and hence it involves gharar (uncertainty).

Manager

It is a committee of policyholders or joint stock company that possesses the license of

practicing insurance business on the basis of a remunerated wakala (agency) contract.

Joint stock company.

Return

Participants in insurance are entitled to the re-turns of their Shari’a-compliant investment of the contributions paid by them and the surplus from

contributions after indemnifying injuries and damages and administrative expenses, etc.

The insured’s relationship with the insurance com-pany terminates on the execution of the insurance

policy and payment of the premium.

Relationship between the company and policyhold-

ers

It is a remunerated agency contract, whereby the policyholders appoint the company as agent to manage the insurance operation and invest-

ment their contributions

The company is a principal party and its relation-ship is that of guratnee only.

Contribution amountsThe company does not own the contributions

because they remain owned by the participants in insurance.

The insurance company owns the amounts against its commitment to pay indemnity in case

of damages.

Investment of amountsThe company invests policyholders’ funds un-der Mudaraba contract while the company and

participants are entitled to returns.

1. The company invests policyholders’ funds for its own account.

2. Investment in all lines of business without any regard to Shari’a principles.

AccountsTwo separate accounts, one for the sharehold-ers and the other for the policyholders (custom-

ers)Once account for the company

Shari’a ruling Permissible Impermissible

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Do you know?Al Zubayr Ibn Al Awwam, may Allah be pleased with Him, used to be approached by prominent people to leave with him their properties in trust. Al Zubayr used to say: “No, it is a loan, because I fear that it may be lost.” Abdulla Ibn Al Zubayr said: “I calculated his debts and found them to be dinars 2.2 million.” He added: “Al Zubayr had four wives, and he set aside one third, and each of the four wives had a share of di-nars 1.2 million.” Some narrate that all his funds were dinars 57.6 million.”

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First: DefinitionZakat: It is a fixed portion of money, prescribed by Allah, the Almighty, to those who are en-titled to it, named in the Holy Qur’an. The word “Zakat” is given to the share set aside from the Zakatable funds. In a sound Hadith, the Prophet, peace be upon Him, said to Mu’adh, may Allah be pleased with Him, when he sent Mu’adh to Yemen: “Inform them that Allah has made it obligatory for Zakat to be taken from their rich and given to their poor.” (Narrated by a group of narrators).

Second: Conditions of Zakat1. Full ownership by the person who is obligated to pay Zakat.2. It should be growing or liable to grow constructively.3. It should reach the Nisab (Zakatable wealth stratum) prescribed in Shari’a, as follows:

• Nisab for funds, minerals and articles of trade (85 grams of 24 carat gold or 96 grams of 21 carat gold).

• Agricultural products: five awsuq (i.e. 653 kilograms).• Livestock (cows, goats and camels), a certain percentage.• Rikaz: It is the treasures extracted from underground and Zakat on it is 20%.

4. Funds should be free of any debts, i.e. payable debts should be deducted from the Zakat-able funds.

5. One complete year should lapse from the time the Nisab is obtained, except for Zakat on agricultural products and Rikaz.

6. Funds should be lawful and pure. Evil and unlawful funds forfeit the condition of ownership, and hence they should be paid to Muslims’ public interest.

Third: Eight heads of Zakat disbursementZakat is paid to the eight categories mentioned in the Holy Qur’an, as follows: “Alms are for the poor and the needy and those employed to administer the (funds); for those whose hearts have been (recently) reconciled (to truth); for those in bondage and in debt; in the cause of Allah; and for the wayfarer: (thus is it) ordained by Allah and Allah is full of knowledge and wisdom.” (Surat Al Taubah- The Repentence- Verse: 60).

Allah, the Almighty, says,“And there are those who hoard gold and silver and spend it not in the way of Allah: announce unto them a most grievous chastise-ment. On the Day when it will be heated in the fire of Hell, and with it will be branded their foreheads, their flanks, and their backs. This is the “treasure which you hoarded for yourself, taste you, then, the (trea-sures) you hoarded.”(Surat Al Taubah- Verses 34-35).

The Messenger of Allah, peace be upon Him, says,“You spent one Dinar for the fight for the sake of Al-lah, one Dinar to liberate a slave, one Dinar to a poor person, and one Dinar to support your family. The most rewarded Dinar is the one that you spent on your family.”(Narrated by Muslim)

Chapter XXVI

Zakat

145

Allah, the Almighty, says,“The Parable of those who spend their wealth in the way of Allah is that of a grain of corn: it grows seven ears, and each ear hath a hundred grains. Allah gives manifold increase to whom He pleases: And Allah cares for all and He knows all things. Those who spend their wealth in the cause of Allah, and follow out up their gifts with reminders of their generosity or with injury-for them their reward is with their Lord: on them shall be no fear, nor shall they grieve.”(Surat Al Baqarah- Verses: 261-262).

1. + 2) The poor and the needy: Those who do not have the sustenance of the day or do not have enough sustenance.

3. Those employed to administer the funds: The people employed to collect and disburse Zakat. 4. The recently reconciled to the truth: Non-Muslims who are expected to convert to Islam, or

recently converted Muslims in order to strengthen them in Islam.5. Those in bondage: Redemption of salves (there are no slaves at present).6. Those who are in debt: Those who are heavily in debt for lawful purposes and who do not have

funds to settle their debts.7. In the case of Allah: Fighters for the sake of Allah, those calling for Islam and students.8. Stranded strangers or wayfarers: The travelers who are stranded away from their families.

Fourth: Method of calculation of Zakat1. The available funds should first be calculated, to determine whether they have reached Nisab or

not, by using the following formula:2. The value of one gram of gold on the day Zakat is paid X 85 =The Nisab amount (i.e. the minimum

amount for paying Zakat. If the balance is below this minimum no Zakat is due on the funds).3. Available funds X (2.5 when Zakat is paid for the Hejra year and 2.5775 for the Gregorian year),

divided by 100 = the amount to be disbursed. Using another method, the available amounts divided by 40 = the amounts to be paid.

Fifth: General rules governing Zakat1. The rule is that Zakat should be paid when due. However, it may be delayed in emergencies and

in exceptional circumstances.2. Zakat does not lapse by prescription.3. It is permissible to expedite payment of Zakat before it is due if necessary.4. It is not necessary to pay Zakat to the eight categories mentioned above, and may be paid only

to one or some of them.5. If the person paying Zakat does not have the money to pay, Zakat becomes a debt due from him,

which should be paid as it becomes available with him

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6. Rulings governing payment of Zakat to relatives

Relative Ruling Remarks

Parents Impermissible They should be provided for.

Grandfather and grandmother Impermissible They should be provided for.

Sons and daughters Impermissible They should be provided for.

Wife Impermissible They should be provided for.

Husband Permissible Provided that he should be one of the categories mentioned earlier.

Brothers and sisters Permissible Provided that they should be one of the categories mentioned earlier.

Father’s brothers and sisters Permissible Provided that they should be one of the categories mentioned earlier.

Mother’s brothers and sisters Permissible Provided that they should be one of the categories mentioned earlier.

Other relatives PermissibleProvided that they should be one of the categories

mentioned earlier.

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Sixth: Table of Zakat rate for contemporary transactions1) Zakat on funds

Type Ruling Remarks

Gold, silver, diamonds, precious stones and other articles of trade

or investment Zakatable A rate of 2.5% of their market value should be paid.

Gold and silver for the woman’s personal use

Non-Za-katable

It is not Zakatable if used during the year and within the limits of usage and custom. However, if the quantity is large and more than the custom, Zakat should be paid on the amount exceeding custom and usage, at the rate of

2.5%.

Diamonds, precious stones and platinum for personal use

Non-Za-katable

According to Dr. Yousuf Al Qaradawi, if the quantity is large and more than the custom, Zakat should be paid on the amount exceeding

custom and usage, at the rate of 2.5%..

Bank notes (cash) Zakatable 2.5%.

Balance of current accounts Zakatable 2.5%.

Balance of savings account and deposits of all types

Zakatable (Zakat

should be paid on principal

and profit).

2.5%.

Stocks for trading purposes Zakatable Zakat should be paid on the market value on the day Zakat is paid.

Stocks for retention and to benefit from their dividends

Value is not Zakat-

able

If the company announces the percentage, Zakat should be paid for every share X the number of shares.

Another opinion is that Zakat should be paid only on their collected dividends, at the rate of 2.5% if they continue to be owned for one

year, or they may be added to the cash and Zakat is paid on the total amount.

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Type Ruling Remarks

Employee’s entitlements in pension and social security funds not yet col-

lected

Non-Za-katable

The reason is that the employee cannot dispose of them. If collected and one year passes, Zakat should be paid on them with other funds.

Employee’s monthly salary Non-Zakat-able

Employee’s provident and savings schemes Zakatable

The funds paid by the employee are Zakatable by adding them to the amounts held by the employee, at the rate of 2.5%

The dividends or amounts not paid by the employer: Non-Zakatable after they are collected, because they are a donation. However, if they

remain for one year, Zakat should be paid on them.

Movement in accounts’ monthly balances due to withdrawals and

deposits, etc.Zakatable

All amounts are added to the principal amounts on the time Zakat is paid, and then Zakat is paid for the entire amount, at the rate of 2.5%, even if one year does not pass for some of the funds. Another opinion

is that Zakat is only due on the funds after one year passes.

Amounts saved for marriage, pil-grimage or to buy a car, house etc. Zakatable Zakat should be paid after one year, if they are not used for the in-

tended purpose.

Personal residential property, furniture and private vehicles

Non-Zakat-able

Property available for sale, i.e. for trading purposes (land or build-

ing under construction or building available for sale) owned by a

trader who sells and buys proper-ties

Zakatable Zakat is paid on the market value every year if one year passes.

Property available for lease Non-Zakat-able

Zakat is paid only on its rental income, which should be added to the cash and Zakat should be paid on the balance. Some scholars

believe that Zakat should be paid on all the income every year.

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Type Ruling Remarks

Property held by a person not engaged in selling and buying

properties, but only sells at time of need or if prices rise

Non-Zakat-able

Zakat is due at the time of sale if one year passes even if it is owned for more than one year

Goods available for sale, such as trading assets in stores Zakatable

Zakat is paid at the end of the year, at the lower of (the purchase price and market price). Many scholars believe that they should be calcu-

lated at the market price

Buildings of factories and their equipment, production tools and

machinery

Non-Zakat-able

Debts owned from other people Zakatable Zakat should be paid when collected, so long as one year or more passes.

Debts owned to other people Non-Zakat-able

No Zakat should be paid if retired, according to the opinion of the majority of scholars. If they are not paid off, Zakat should be paid on

them according to one opinion, while no Zakat should be paid accord-ing to another opinion.

Inheritance funds after they are col-lected Zakatable Zakat should be paid after one year from collection.

Charitable Waqf funds Non-Zakat-able

Family Waqf funds Zakatable Zakat should be paid at the rate of 2.5%.

Yields of the sea for trading pur-poses Zakatable Zakat should be paid at the rate of 2.5%.

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2) Zakat on agricultural products and fruits

Type Ruling Remarks

Different types (grains, dates, barley, etc.) Zakatable

The Nisab for agricultural products and fruits is as follows: Applicable Zakat is 5% if irrigated.

Applicable Zakat is 10% if non-irrigated.Applicable Zakat is 7.5% if partially irrigated.

Projects under process in agricul-tural installations

Non-Zakat-able

Accessories of production, such as fertilizers, pesticides, rapping

and packing materials

Non-Zakat-able

Land leased by the farmer Zakatable Zakat should be paid pro rata the shares of the farmer and the land-owner.

3) Zakat on livestock (camels, cows and goats)

Type Ruling Remarks

Livestock used for trading pur-poses Zakatable Zakat on items of trade is applicable (2.5%)

Livestock used in plowing, carry-ing and irrigation

Non-Zakat-able

Other animals (other than camels, cows and goats)

Non-Zakat-able

Zakat should be paid only on those which are used for trade. Animals owned for adornment or use are not Zakatable.

Milk, wool and chickens’ eggsNon-Zakat-

able Zakat should be paid only on what is owned for trade

Chickens acquired for productionNon-Zakat-

able

Camels, cows and goats fed through free grazing

Zakatable According to the following table

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Goats

RateZakat

From To

40 120 1 Goat

121 200 2 Goats

201 300 3 Goats

For more than 300, one goat for every 100 goats

Camels

RateZakat

From To

5 9 1 Goat10 14 2 goats

15 19 3 goats

20 24 4 goats

25 35Bint Makhad camel (at the second year

of age)

36 45Bint Laboon camel (at the third year

of age)

46 60 Hiqqah camel (at the fourth year of age)

61 75 Jatha’ah camel (at the fifth year of age)

76 90 2 Bint Laboon

91 120 2 Hiqqah

121 129 3 Bint Laboon

• For more than 129, one Bint-laboo• for every 40 camels and one Hiqqah

for every 50 camels

Cows

RateZakat

From To

30 39 Tabee’a or Tabee’ah

40 59 Musinnah

60 69 2 Tabee’a or 2 Tabee’ah

• For more than 129, one Tabee’a or one Tabee’ah for every 30 cows and one Musinnah for every 40 cows.

• 2 Tabee’a or 2 Tabee’ah

• Bint Makhad came: one year old camel, and it is given this name because her mother is pregnant.• Bint Laboon camel: two year old camel, and it is given this name because her mother is producing milk.• Hiqqah camel: three year old camel, and it is given this name because it is fit for riding.• Jatha’ah camel: four year old camel who has dropped its front teeth.

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The Messenger of Allah, peace be upon Him, says,“For any of you to take a rope and go to a mountain where he gathers a bundle of dry wood and carries it on his back to sell it, thus sparing himself the need to beg, is better than seeking other people’s help, be it readily forthcoming or denied. The reason is that the upper hand is better than the lower hand, and so start with your family.”(Narrated by Muslim)

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Finally, Islamic economics in general, and Islamic banking in partic-ular, are witnessing a remarkable growth and development, accelerated by wide acceptance of them by people and their understanding of their objectives as a system not established by human beings. It is a divine system with all its general prin-ciples and rules and it has been implemented by pioneering scholars, who drew from the light of Islam and its objectives this art, until it reached the state it has reached.

Perhaps by writing this book we have been endowed with suc-cess from Allah, the Almighty, in determining the principles and rules of this art. Eventually, the role is for practitioners to con-tribute to its development and publication.

Allah is the purveyor of success.

Conclusion

References

1. Shari’a Standards for Islamic Financial Institutions by the Accounting and Auditing Organization for Islamic Financial Institutions.

2. Accounting Standards for Islamic Financial Institutions by the Ac-counting and Auditing Organization for Islamic Financial Institutions.

3. Research in Islamic banking transactions and techniques (Volumes 1-9), Dr. Abdul Sattar Abu Ghuddah, Al Baraka Banking Group.

4. Loans in Islamic financial institutions and conventional financial institutions, Dr. Yasser Ajeel Al Nashmi, Dar Al Dia’ Printing and Publishing House.